The Epicurean Dealmaker

Out of Service

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 05 Apr 2015 13:14:00 +0000

I met a traveller from an antique land
Who said:—Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,
Half sunk, a shatter’d visage lies, whose frown
And wrinkled lip and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamp’d on these lifeless things,
The hand that mock’d them and the heart that fed.
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye mighty, and despair!”
Nothing beside remains: round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away.

— Percy Bysshe Shelley, “Ozymandias”

Look on my works, ye mighty, and take care:

Introduction
Table of Contents
Preface to the occasional reader
Oop. Time, She’s Up

Cheerio.

~ THE END ~
© 2015 The Epicurean Dealmaker. All rights reserved.

Uncle Warren Explains It All to You

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 01 Mar 2015 21:45:00 +0000

“Sure, sure.”

— Sidney J. Mussburger, The Hudsucker Proxy

Apparently some doddering old fart in Omaha, Nebraska published a celebratory letter yesterday in connection with an obscure anniversary some of you might have heard about. Something to do with a mid-range furniture store or failed textile mill or something. Anyway, I felt compelled to read it, if only because every financial pundit in the Western Hemisphere has been recommending its salutary virtues to me with a fervor approaching the evangelical. Personally, I found it more hokey and self-congratulatory than illuminating, but then again I tend to prefer my moral fiber to come unencumbered by six cups of refined sugar and smug self satisfaction per serving. I know, I know: I am downright un-American.

If you care about the content of this man’s nattering—and the compl(i/e)mentary nattering of his partner in cast iron cheer—I would refer you to Matt Levine, who offered a very serviceable summary unburdened by the usual encomia breathlessly showered on this duo by all and sundry. He points out that the success of the business purchasing part of this entity can be neatly reduced to the skill with which the principal buys and sells said businesses, and not hands on management and supervision thereof, which said demiurge studiously avoids. This strikes me as essentially correct. He also calls attention to an aspect of the jolly old elf’s behavior that tends to be overlooked by his cheerleaders: he is a ruthless allocator of the bounteous capital at his command. Far from his image as a genial rich uncle offering cozy and undemanding shelter from the withering blasts of shareholder capitalism to skittish families and corporate management teams in search of a few shekels to renovate their yachts, Mr. Buffett drives a hard bargain going in and, in the event the bloom comes off the rose, delivers an even harder kick in the pants going out.

Warren buys cheap, and then he owns your ass in perpetuity, unless he decides to dump you. Which is just fine, by the way: it’s what his shareholders want him to do, and he has been very successful at it. It just amuses me this incontrovertible characterization seems to elude almost everybody who has gushed about him in the past.

* * *Aaannnyhoo, Warren Buffett is a serial acquirer of companies, inter alia, and he is indisputably good at it. And this explains (if does not condone) the snarky barbs he sends my direction, railing against investment bankers, to which my response is the entire point of this peroration. Now everybody knows, your defensive correspondent included, that nobody likes investment bankers, so I do not anticipate my remarks will undermine the regard in which the Great Man is held by anybody. Nor do I begrudge a beloved financial celebrity and multibillionaire a little fun in kicking the mangy village cur everybody hates, but I do hope to persuade at least a few of you that Mr. Buffett’s critique of my industry is not disinterested.

Uncle Warren’s critiques of investment bankers are scattered throughout his missive, but probably the highest concentration is located in his section on Berkshire Hathaway as a conglomerate, starting on page 29. The money shot, so to speak, is concentrated on pages 31–32:

Berkshire has one further advantage that has become increasingly important over the years: We are now the home of choice for the owners and managers of many outstanding businesses.

Families that own successful businesses have multiple options when they contemplate sale. Frequently, the best decision is to do nothing. There are worse things in life than having a prosperous business that one understands well. But sitting tight is seldom recommended by Wall Street. (Don’t ask the barber whether you need a haircut.)

When one part of a family wishes to sell while others wish to continue, a public offering often makes sense. But, when owners wish to cash out entirely, they usually consider one of two paths.

The first is sale to a competitor who is salivating at the possibility of wringing “synergies” from the combining of the two companies. This buyer invariably contemplates getting rid of large numbers of the seller’s associates, the very people who have helped the owner build his business. A caring owner, however – and there are plenty of them – usually does not want to leave his long-time associates sadly singing the old country song: “She got the goldmine, I got the shaft.”

The second choice for sellers is the Wall Street buyer. For some years, these purchasers accurately called themselves “leveraged buyout firms.” When that term got a bad name in the early 1990s – remember RJR and Barbarians at the Gate? – these buyers hastily relabeled themselves “private-equity.”

The name may have changed but that was all: Equity is dramatically reduced and debt is piled on in virtually all private-equity purchases. Indeed, the amount that a private-equity purchaser offers to the seller is in part determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company.

Later, if things go well and equity begins to build, leveraged buy-out shops will often seek to re-leverage with new borrowings. They then typically use part of the proceeds to pay a huge dividend that drives equity sharply downward, sometimes even to a negative figure.

In truth, “equity” is a dirty word for many private-equity buyers; what they love is debt. And, because debt is currently so inexpensive, these buyers can frequently pay top dollar. Later, the business will be resold, often to another leveraged buyer. In effect, the business becomes a piece of merchandise.

Berkshire offers a third choice to the business owner who wishes to sell: a permanent home, in which the company’s people and culture will be retained (though, occasionally, management changes will be needed). Beyond that, any business we acquire dramatically increases its financial strength and ability to grow. Its days of dealing with banks and Wall Street analysts are also forever ended.

Some sellers don’t care about these matters. But, when sellers do, Berkshire does not have a lot of competition.

This really is masterful trolling. In one sequence, investment bankers, corporate acquirers, and private equity firms are all depicted by the Oracle of Omaha as modern day Snidely Whiplashes, evilly twirling their mustaches as they sell unnecessary transactions, “invariably” fire trusted and loyal employees, and repeatedly ravage the sanctity and probity of the acquired company’s balance sheet with dat ole debbil Debt. In contrast, Berkshire Hathaway is characterized as a veritable lavender-scented bosom of motherly protection and comfort.

Old Warren knows his audience, and his audience in this section is family-owned businesses or professional managers of corporate subsidiaries who aspire to get off the big company hamster wheel. The former, in particular, tend to be less sophisticated when it comes to matters financial, and hence are ripe targets for terrifying with images of slick, rapacious professional rapscallions just waiting for a chance to spring upon Aunt May and ravish her repeatedly over a cracker barrel. But of course most of it is tendentious bullshit.

* * *I will not try your patience or mine by responding to each attack detailed above. Instead, I will only note that Warren is so eager to characterize non-conglomerate corporate acquirers and private equity firms in so unflattering a light because they are his competitors for buying companies. Likewise, he takes a swipe at my profession because our job and livelihood is attempting to get the best possible deal for our clients who are sellers. An important part of this for most sellers, of course, is maximizing the monetary value they receive for their companies, subject to other interests and constraints. And because Berkshire Hathaway brings no revenue or cost synergies to the table, unlike non-conglomerate corporate buyers, and can be disadvantaged against financial sponsor buyers due to their ability to pay with very cheap, tax deductible debt, Warren is often the least attractive buyer in terms of price offered. Not all potential sellers care only about receiving the highest possible price, but almost all of them are interested in price to some degree, so it is our duty as sell-side representatives to make this dynamic clear to our client. This, I am confident, does not please the Great Man.

This is also why Mr. Buffett refuses to participate in auctions for companies, since auctions are usually recommended and run by investment bankers for price discovery purposes and tend to result in higher realized prices than proprietary negotiations with one buyer. As a sophisticated serial acquirer of businesses, Warren would much prefer to deal with wet behind the ears families lacking professional representation, since the presence of the latter can end up making the terms he has to offer, if he can bring the seller to the finish line in the first place, much less attractive to Berkshire Hathaway and its shareholders than might otherwise happen. A professional advisor, even if her client decides he wants to join the warm embrace of Mother Buffett at a lower price than he could achieve in a more thorough market test with different kinds of buyers, can also help by pointing out potential pitfalls and precedents that might attend such a decision.

Personally, I thought two stories Mr. Buffett related at separate points in his letter were revealing in ways highly pertinent to a client considering selling his business to him. In the first, Warren proudly related how he beat down the family owners of See’s Candy in 1972 from their asking price of $30 million to $25 million. He later revealed that See’s subsequently generated over $1.9 billion in pre-tax earnings, cash flow which Warren diverted from growing the candy business to buy unrelated portfolio companies. It made me wonder what the poor saps in the See’s family did with what was left of the $25 million in cash Warren gave them after they paid taxes. I sure hope they used some of it to buy Berkshire Hathaway stock, because it’s undeniably true that BRK shareholders (including Mr. Buffett) are the only ones who got a good deal from that transaction. The second story, which represents a mirror image to See’s, is Dexter Shoe, in which Warren complained about buying a doomed shoe company for $433 million in 1993 for which he paid the owners BRK shares worth $5.7 billion today. Notwithstanding any present value advantage to a tax deferred sale of your company for Berkshire Hathaway stock instead of cash (consult your tax advisor), it’s clear the preferred currency for any seller to the Sage of Omaha should be BRK stock, since that is the one currency he prefers to keep to himself.

Anyway, Mr. Buffett is, among his other talents, a serial buyer of companies. Unlike the other big class of professional company buyers, however—private equity companies, who tolerate investment bankers because they need us to help finance and eventually sell their purchases—Mr. Buffett needs no help financing and never intends to sell the companies he buys. Accordingly, he despises investment bankers and employs his considerable folksy charm to scare potential business sellers away from using us for the plain and simple reason that we make his job harder and more expensive. For sellers of companies, investment banks level the playing field.

We all know Warren Buffett is a very clever, very successful investor. Warren Buffett hates level playing fields.

Related reading:
Warren Buffett and Charlie Munger, 2014 Annual Letter to the Shareholders of Berkshire Hathaway Inc. (February 28, 2015)
Matt Levine, Warren Buffett Explains His Cozy Embrace (Bloomberg View, February 28, 2015)

© 2015 The Epicurean Dealmaker. All rights reserved.

Goldman Sachs Doesn’t Care What You Think

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 14 Feb 2015 17:20:00 +0000

A cat may look at a king.

— English proverb

So, in an apparent effort to raise its rank in the Most Recognized Polling Firm in America Sweepstakes, Harris Poll recently published a survey of 27,278 individuals across this fine land to determine America’s 100 most- and least-loved corporations. Bloomberg Business subsequently took time out of its busy day to gleefully report that Goldman Sachs, investment bank and über squid of the global financial markets, finished dead last:

People hate Goldman Sachs more than oil spills and the Koch brothers.

Well, far be it for me to rain on Bloomberg’s and Harris Poll’s parade, but I am here to tell you children, with complete confidence, that Goldman Sachs just doesn’t care what you think.

Now this does not mean there isn’t some poor (relatively) underpaid slob scurrying around Goldman Sachs’ Public Relations Department pulling out his or her hair, fretting that you and your Aunt Millie in Rochester think poorly of his or her employer. After all, big corporations like Goldman Sachs have to employ people like that whose job it is to care, if only for appearances’ sake. Generally conveying to the public at large that you don’t give a fuck tends not to play well and can introduce all sorts of petty annoyances and frictions in the conduct of one’s business, so spending a few otherwise forgettable millions on PR can work out to be a good investment.¹ This is common knowledge.

But deep in the bowels of Goldman’s money spinning machine and high in the corridors of the executive suite at its West Street headquarters, you may safely assume the people who matter do not give a flying fuck in a rolling donut that you don’t like them. Sorry to be harsh, but there it is.

* * *

Now I realize such indifference to negative public opinion may strike you as odd, given that our culture’s highest aspiration seems to be getting Kim Kardashian to “like” your Facebook post gushing over her latest dress, so I am happy to take a few hours from my Saturday morning to explain.

First of all, of course, there is the fact that Goldman Sachs does not sell soda pop. The Bloomberg article ventures:

A bad reputation can affect a company’s bottom line. Harris Poll says 36 percent of adults have decided not to support a business because of something questionable they learned about its conduct. And more than half of consumers now do some research on the businesses they’ve either heard about or are about to spend money on. The findings suggest that companies aren’t as immune from moral blunders—be it expired meat or toxic mortgages—as they once might have been. “The American public strongly believes reputation matters and acts on that belief,” said Carol Gstalder, Harris Poll’s reputation and public relations practice leader.

How, pray tell, do you and your Aunt Millie intend to act on your disgust with Goldman? Do you intend to boycott their supermarkets, buy your cell phone from another manufacturer, or drive a mile out of your way to get gas from a less despicable energy company? Oh, I know: you’ll refuse to invest in their mutual funds or use their mobile trading app to make $9.99 option trades, right? Fat lot of harm that’ll do Lloyd Blankfein: Goldman isn’t in any of those businesses. Goldman Sachs operates in wholesale finance—buying and selling securities and other financial instruments across global markets on behalf of itself and institutional clients, advising on mergers and acquisitions for corporations and private equity firms, and underwriting securities for issuers who want to raise money from institutional investors.² They wouldn’t recognize you or your Aunt Millie if they ran you over in a Wegman’s parking lot. You—America’s vaunted consumers, Harris Poll’s respondents—are not Goldman Sachs’ clients. Your principled pocketbook wields no power over them.

Furthermore, among Goldman Sachs’ real clients—hedge funds, large institutional investors, corporations, and private equity firms—I would suggest that the Squid’s slightly salty reputation in society at large may actually act to attract and retain the wholesale business it seeks to conduct. For one thing, many of these clients either have or are not unfamiliar with slightly disreputable public reputations themselves, and they understand that the criteria which the hoi polloi use to judge large, powerful organizations harshly are, in many if not most respects, completely beside the point. Goldman Sachs is where it is—and, frankly, recognizable to Harris Poll’s respondents—because it is and has been extremely successful at what it does. Clients who can choose tend to work with powerful, successful firms who can serve their needs effectively, whether it is raising capital, buying or selling a company, or helping them trade their investment portfolio. Success breeds success in investment banking, and choosy clients want to work with a winner. To hell with its reputation.

There is more. Goldman Sachs’ clients also understand that the markets and services in which it operates are tough, unforgiving, sharp-elbowed places. Having a bad reputation—scary, ruthless, willing to throw your weight around—is exactly the kind of banker many (most?) clients want at their side. This is the very same sort of thinking that compels common folk like us to hire flesh-eating lawyers when we get into a legal dispute, notwithstanding the fact lawyers’ reputation for probity has ranked somewhat beneath pond scum for, oh, approximately forever. Nobody wants to bring Mother Theresa to a knife fight.

Lastly, you may be surprised to learn Goldman’s appeal even extends to those institutional customers who take the position of counterparties with the Squid, rather than as clients. These are firms which trade with Goldman as principal or which purchase its structured products like CDOs and other nasty items and whose interests, you would correctly surmise, are not at all aligned with those of the Great Blue Beast. But they still do business with Goldman because it is the axe (best source of opportunities) in certain areas, because it is extremely well connected in the markets, and because it comes up with some nifty investment products that investors want to own or trade. Even during the height of the Financial Crisis, when Goldman’s public reputation for probity was in tatters over the Abacus trades and suchlike, intrepid reporters could find almost no-one in the markets who would admit they would not trade with Lloyd’s cephalopods. Goldman’s reported financial results since have demonstrated beyond doubt that it remains one of the leading trading houses in the world, notwithstanding (because of?) its fearsome reputation.

So much for consumer boycotts.

* * *

Bloomberg also advances the notion that Goldman’s naughty public reputation might degrade its ability to attract and retain bright young squids-to-be. This is more plausible, since I think we can all agree little Muffy and Bif do not want—other things being equal—to spend Christmas vacation watching Aunt Millie’s upper lip wrinkle in disgust whenever they mention their summer internship at 200 West Street. A firm’s public reputation does matter to potential new recruits, simply because it is one of the very few things most young aspirants actually know about a firm or the business it conducts before they actually start to work there.³ (I’m sorry, children: most of you graduate college without a clue.) Surely a scarlet letter from the Department of Public Opinion will scare away some of the Best and Brightest young snowflakes from the Squid’s gaping maw?

Well, let’s take a look at the data, helpfully released five days later on that very same Bloomberg Business website wherein the poll piece appeared, no doubt courtesy of the follicly-challenged Goldman PR factotum we speculated on earlier:

Goldman Sachs Group Inc. hired just 3 percent of more than 267,000 job applicants last year, as the firm told investors it’s still the top destination for bankers.

and

Fortune magazine named the New York-based bank one of the 100 best companies to work for, a citation Goldman Sachs has received every year since the list began in 1984, according to [CEO Lloyd] Blankfein’s presentation.

Huh. So, not so bad then.

Sure, there may be a few eager young beavers sporting brilliance, drive, and impeccable credentials who decline to investigate career paths to filthy lucre at the Squid, but I doubt anyone will notice. As I have banged on about repeatedly in these pages before, investment banks do not really need the Best and Brightest. (Whoever they are supposed to be. Also, who judges?) We just need smart-enough, driven, ambitious grinders in sufficient quantities to lubricate our millstones with their blood and a significantly smaller number thereof who discover or develop a talent and taste for the business to stay on and lead the troops. Let the will-o-the-wisp starfuckers—those pathetic creatures who follow every social trend pointing to the conventionally agreed upon “best” college/job/spouse/mobile dating app—enjoy their indentured servitude at Facebook, Google, and Uber. Goldman Sachs and its competitors will have plenty of talented youngsters to choose from.

Besides, as Lloyd’s PR rep pointed out, they don’t need that many:

The firm said in May 2013 that it had 17,000 applicants for 350 spots in a summer analyst program in its investment-banking division.

* * *

So let’s recap. Goldman Sachs is ranked dead last in reputation among the 100 best-known companies in America by people who do not buy its products or services and, more likely than not, don’t even know what it does. But Goldman Sachs is also ranked among the top 100 best employers for people who do add value to the firm by joining it and slaving in its salt mines. That looks like a pretty comfortable calculus to me. This is not what keeps Lloyd Blankfein up at night.

However, there is a third force at work in Lloyd’s world that does nag at his equanimity. A force which relies almost exclusively on the aggregated opinions of individuals who have little or no insight or knowledge to back them up. A force which makes enormous efforts to shape public opinion to advance their collective agendas and personal careers. A force which, while it understands that public opinion can be empty of reasoned judgment, easily swayed and manipulated by emotional appeals, and incapable of other than fickle attention, also knows that it can be shaped into a powerful force for change, good or bad. A force which empowers bureaucrats to harry and constrain banks like Goldman with the power of law.

This force, of course, comprises the politicians, who have languished at the bottom of public opinion polls themselves—below lawyers and pond scum—for longer than forever.

You can bet Senator Warren and her kind enjoyed that Harris Poll.

* * *
Disclosure: I do not now nor have I ever worked at Goldman Sachs, I have no financial interest, direct or indirect, in the firm or any of its securities, and I don’t really even have any friends there. Frequent readers of this jeremiad emporium will remember that I am of the firm and repeatedly expressed opinion that, while Goldman Sachs is amazingly successful and powerful as a firm, its members and employees are often underwhelming on an individual basis. I marvel—and, as a competitor bested by Goldman bankers many more times than I care to remember or relate, chafe—at its success and can only regret that I have not had such a powerful platform from which to ply my trade during my career. So, as much as it can be, you may take this defense as a disinterested one.

Related reading:
Akane Otani, America’s Most Loved and Most Hated Companies (Bloomberg Business, February 5, 2015)
Michael J. Moore, Goldman Sachs Hired 3% of 267,000 Job Applicants Last Year (Bloomberg Business, February 10, 2015)
The Fish Stinks from the Head (July 30, 2009) – Goldman Sachs’ culture and success

¹ In the good old days, Goldman did not agree with this sentiment. In the good old days, they employed Lucas van Praag. I miss the old bugger.
² Yes, it’s true that Goldman Sachs does offer wealth management and retail brokerage services to rich individuals and families, also, so they do have a presence in retail financial services. (It is not large in the context of Goldman’s revenues.) But I venture to guess that individuals and families with tens if not hundreds of millions of dollars under management with the Squid do not have quite the same consumer preferences as the rest of us poor slobs. If your Aunt Millie is loaded, maybe she will prove me wrong.
³ You can take my word for it that the reasons Goldman’s clients and counterparties do business with the firm are the same reasons the much smaller number of lateral hires and later-stage career recruits want to join it. Almost everybody wants to work for a winner, too.

© 2015 The Epicurean Dealmaker. All rights reserved.

Passing Fair

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 18 Jan 2015 21:13:00 +0000

What though the sea with waves continuall
Doe eate the earth, it is no more at all ;
Ne is the earth the lesse, or loseth ought :
For whatsoever from one place doth fall
Is with the tyde unto another brought :
For there is nothing lost, that may be found if sought.

― Edmund Spenser, The Faerie Queene

Municipal bond market maven, government official, and longtime Twitter fixture Kristi Culpepper penned an interesting riposte yesterday to Leon Wieseltier’s recent jeremiad against the disruptive cultural effects of technology in The New York Times. Leon, you may recall, laid about rather vigorously with his rhetorical cudgel in defense of humanism against the allied evils he sees arrayed against it today, including technologism, scientism, data fetishism, and commerce. He declared—correctly if rather dramatically—that “A culture is an internecine contest between alternative conceptions of the human.” And he, if I may be so blunt, came down on the side of writing, art, and Western cultural patrimony and against the forces who wish to strip, devalue, and denature same in the name of technological progress and efficiency.

Now, being as I have consistently declared myself an amateur and aficionado of such arty, literary, cultural-y things, I am sympathetic to Mr. Wieseltier’s arguments, although I do think he lays it on a bit thick in the straw man department. I also have reservations that his full-throated defense of writers and thinkers against the commoditization, devaluation, and impoverishment of a certain sort of careful, deeply informed thinking and writing by the forces triumphant of digital and social media is a bit overblown. For one thing, I would observe Mr. Wieseltier himself seems to have had no problem securing a soapbox at the paper of record for the liberal intelligentsia to spout his opinions, mere weeks after the implosion of his prior perch at The New Republic due to the machinations of the sort of technologist philistines he decries. Second, I utterly fail to see a shortage of intelligent, hardworking writers pontificating on important matters and sundry throughout the English speaking opinionsphere. It seems that everybody and his brother and his brother’s three-legged cat are scribbling as journalists, bloggers, opinion editors, MFA students, novelists, and nonfiction writers nowadays. When I walk into the ground floor of my local 50,000 square foot Barnes & Noble bookstore, I am not struck by any dearth of written material for my perusal, and the ground floor of my store is not filled with the works of dead white men (those are in the basement). Speaking as an acolyte of microeconomics (and a minor unpaid contributor to the general oversupply of published dreck), it strikes me that writers face a supply problem in the market for their wares, not a lack of demand. Maybe if writing weren’t so popular as a lifestyle choice, rather than an actual calling for a dedicated few (as it has been for most of recorded time), fewer professional writers would be bemoaning the parlous state of their bank accounts.

Be that as it may, Ms Culpepper takes issue with our Cultural Cassandra from another direction:

First, innovation presents new opportunities to define oneself for those that are willing to invest the time and effort. The same is true for society as a whole. That Wieseltier doesn’t want the character of society to be determined by engineers overlooks history. Feats of engineering have been a conduit for conversations about the public good and the ambitions of civilization from ancient Rome to NASA. I don’t understand the temptation to hold art or poetry above these endeavors. I would trade all the Jeff Koons in the world for a better understanding of what lies outside our solar system.

(Personally, I would be content to pack all of Jeff Koons’ art and the artist himself on a spaceship launched into the Sun for no counterbalancing intellectual recompense whatsoever. I’d even be willing to erase some string theory and most of Jacques Lacan’s drivel from the cultural patrimony for the privilege. Mais à chacun son goût.)

Second, most criticisms of technology are highly selective. Why is it that garbage media is the first thing people think of when they lament the invention of the smartphone? This is the same device that allows a trauma surgeon to know a patient’s statistics as he sprints to the operating room. Where’s the angst in that?

This is an excellent point. Technology is by definition a tool. And while tools are by definition teleological in nature, they are usually far more value neutral than we reflexively consider. A hammer can be used to build a prison, a library, or a church; a hammer can be used to repair a child’s dollhouse or murder an enemy. The same thing is true of digital media. While Ms Culpepper is no fan of modern journalism, she draws attention to the fact that current technology has enabled an enormous explosion in democratic access to ideas and information, a point Mr. Wieseltier concedes himself. And yet the same tools which enable on-demand, real time access to almost all of humanity’s accumulated knowledge to anyone are the same tools that let almost anyone produce and contribute to them at will, regardless of quality or credentials.

The sword of innovation almost always has (at least) two edges. It is up to the user to use the tool properly and deliberately, and to minimize the harm of unintended effects or negative outcomes.

* * *

More broadly speaking, I get the sense Mr. Wieseltier is fighting a rearguard action against change itself. He does not like the current technology, science, and economic triumphalism sweeping through Western society because it does not value—and it may actively harm—those things he holds most dear, the things he has spent his life learning, loving, and fighting to preserve. This is understandable, if only as human psychology, but it is not an argument. Change is natural. Change is ineluctable. Life is change.

I am not afraid of change, even if not all of it is for the better. Frankly, there are very few human societies—ours included—that couldn’t benefit from a little disruption. The opposite of technological change and disruption is stagnation and the ossification of socioeconomic power structures. Human beings are lazy. (Or, if you prefer a less pejorative characterization: humans naturally and quite sensibly conserve their own energy.) If something does not force us to change, we will not do so. It is too… disruptive. Internally and externally imposed disruption is what forces us, both as individuals and societies, to adapt and change to new circumstances and environments. And let us not kid ourselves: not all change is good, and very little good change is unalloyed with bad. Change, even when positive overall, is painful and annoying, and it often destroys things we hold most dear.

We must strike a balance here. We must neither champion change mindlessly nor suppress it willfully. Neither extreme is healthy, for change will come whether we want it or no, and change is dangerous, for we cannot see all ends. I have cited the maxim of Chesterton’s Fence before, which encourages reformers to educate themselves about the history and intent of social institutions before they decide to destroy them, as a bar to change for change’s sake. But conservatively minded people should heed its message, too: if you discover the purposes for which an institution were created no longer apply, or its effect has evolved into a positive impediment or harm to current objectives, it is incumbent upon you to destroy it also. Chesterton’s Fence is no bar to change or reform. It is a warning to manage change mindfully.

* * *

So far we have talked about intentional change, at the level of culture and society. But we must not forget that our intentions are guided in part by our predictions of the effects our changes will have. And, in this respect, our track record as a species is abysmal. It is a truism by now—or should be—that forecasts of the future are reliable only as a guide to what is most certain not to happen. Railways to the Moon, flying cars, sentient artificial intelligence, post-apocalyptic dystopia: none of these predictions, serious or semi-serious, over the past 100 years has come remotely true. Part of this must be due to our intellectual energy-conserving tendency (q.v. supra) to extrapolate the future from the confines of our current environment. A railway to the Moon was obvious. Nobody predicted Facebook.

But another part is due to our ignorance and blindness. We are ignorant of how major changes are incorporated into, adapted to, and create second and third order feedback effects within something as complex and changeable as a culture or society. We underestimate our own social and cultural inertia. We cannot foresee how human actions will affect our physical and natural environment, or how extra-human feedback effects will dampen or amplify our behavior to our benefit or detriment. We see but little of this even now, and that through a glass darkly. Finally, we forget just how small and insignificant we are in the scheme of things. I love wilderness and Nature as much as anyone, but I can’t help but laugh when I hear activists freak out about preserving spotted owl habitat, when neither human beings nor spotted owls existed for 99.9% of this planet’s physical existence. As if it matters in the context of the Cambrian Explosion, or the Permian Extinction, or the inevitable future subduction of virtually all evidence of human habitation on this planet into the Earth’s mantle.

Yes, Children: flowers wilt. Beauty fades. Human beings are born, grow up, age, and die. Societies and cultures do too. The Earth keeps spinning in her orbit, and the icy vacuum of space marches inexorably on toward… something. Change is inevitable. Not all of it is pleasant, but it has its beauty, too. Change gives an edge of poignancy to the things and people we love, because we know, if we are honest with ourselves, that these too shall pass. We can try to hold onto them, cling to them tightly and never let them go, but go they do. It is up to us to enjoy them, love them, appreciate them while they and we are here.

So with all due respect to Dylan Thomas and Leon Wieseltier, I would rather not rage, rage against the dying of the light. Instead, I’d like to sit down with a drink and a cigar and enjoy the sunset.

Related reading:
Kristi Culpepper, A Defense of Disruption as a Cultural Phenomenon: Responding to Leon Wieseltier (Medium, January 17, 2015)
Leon Wieseltier, Among the Disrupted (The New York Times, January 7, 2015)
Chesterton’s Fence (March 5, 2012)

© 2015 The Epicurean Dealmaker. All rights reserved.

Nerd Intersectionality

noreply@blogger.com (The Epicurean Dealmaker) — Fri, 02 Jan 2015 20:45:00 +0000

Infancy is not what it is cracked up to be. The child seems happy all the time to the adult, because the adult knows that the child is untouched by the real problems of life; if the adult were similarly untouched he is sure that he would be happy. But children, not knowing that they are having an easy time, have a good many hard times. Growing and learning and obeying the rules of their elders, of fighting against them, are not easy things to do. Adolescence is certainly far from a uniformly pleasant period. Early manhood might be the most glorious time of all were it not that the sheer excess of life and vigor gets a fellow into continual scrapes. Of middle age the best that can be said is that a middle aged person has likely learned how to have a little fun in spite of his troubles.

It is to old age that we look for reimbursement, the most of us. And most of us look in vain. For the most of us have been wrenched and racked, in one way or another, until old age is the most trying time of all.

— Don Marquis, “The Almost Perfect State”

I was browsing the online portal for the My Emotional Wounds Are Bigger Than Your Emotional Wounds Victims’ Society¹ this morning, O Dearly Beloved, when I encountered an essay by feminist firebrand Laurie Penny in which she took MIT Professor Scott Aaronson to task for justifying nerds’ insensitivity to male privilege in the technology industry. Notwithstanding some hyperbolic posturing about what Penny calls the “disaster of heterosexuality” [sic], it reads as a sensitive and revealing first person demolition of the notion that white male nerds faced some sort of unique hell growing up that can possibly justify their current behavior. I’ll let you go ahead and read it, if that’s your sort of thing.

If it is not, or you are back already, I would prefer to direct you to an earlier essay by computer nerd Pete Warden, cited approvingly by Penny and unfamiliar to me until now. In his essay, Warden, a die-hard, early adopter hacker type übernerd, correctly points out (in inimitable nerd fashion) that technology nerds, far from being the underdogs they so painfully remember being in their adolescence, are now Kings of the Hill:

We’re still behaving like the rebel alliance, but now we’re the Empire.

This is spot on. But then Warden goes and ruins the ride when he corrects Marc Andreessen’s assertion that nerds and bros are natural enemies with this:

Sure, we used to be picked on or ignored by the bro’s, but that was when we had no money or power. Now we have status, bro’s are happy to treat us as buddies instead of victims, to the point that we’re unlikely to think of them as bro’s. I’ve pitched most VC firms in the Valley at one time or another, and a lot of the partners come from business or finance backgrounds. There are nerds in there too of course, and they do control the culture, but they also get along perfectly well with the preppy MBAs. The same holds true across the whole tech industry – they might have tried to steal our lunch money twenty years ago, but now they’re quite happy running biz-dev while we do the engineering.

This is very muddled thinking as well as remarkably tone deaf observation as to what and who constitutes a “nerd” and a “bro” and the differences between them. But what should one expect from a nerd?²

* * *

Mr. Warden seems to identify the venture capitalists (“VCs”) and business development (“biz-dev”) colleagues he interacts with as bros because they have business or finance backgrounds, MBA degrees, and/or wear “preppy” clothes. This is just dumb. I have met a number of Silicon Valley venture capitalists and BD personnel over the years, and I can tell you from personal experience most of them would only come across as bros to someone who lives in a basement cave and thinks real women look and dress like Lara Croft in Tomb Raider. These people are as nerdy as they come. Sure, they prefer to geek out over cash flow statements and Definitive Purchase Agreements rather than hexadecimal code and API protocols, but geek out they do. They are just as scary smart, obsessive compulsive, and single minded as any computer hacker/programmer, and they tend to have the same awkward social skills as everyone else on the Asperger Syndrome spectrum they share with Mr. Warden and his peers. To the casual observer they may look and dress the same as a B– average fraternity brother from a state school, but they didn’t earn summa cum laude economics degrees from Stanford or the Ivy League, get Baker Scholarships at Harvard Business School, and claw their way into a partnership on Sand Hill Road from Morgan Stanley or Goldman Sachs because they liked to drink beer and flick bottle tops at computer science majors from the porch of their frat house.

Successful venture capitalists, private equity professionals, hedge fund managers, and investment bankers are as nerdy as they come. I mean, please: look at John Doerr, David Bonderman, Bill Ackman, and Lloyd Blankfein, for chrissakes. Those were the kids the football team beat up for lunch money in high school. Apart from shorter haircuts, plaid shirts, and an unfortunate predilection for chinos as casual wear, financial professionals share remarkably few of the features of true bro culture. In fact, you’re much more likely to find them running an ultramarathon or climbing Machu Picchu in their spare time than eating nachos on the couch in front of a football game. They are weird, they are driven, and they are the same awkward misfits who spent Saturday nights in high school doing extra credit calculus problem sets while the popular kids went out to drink beer and try to get laid. That is what I did, and I guarantee you it is what most of my colleagues and counterparts did too.

Now as is the case for all such qualities (and inconveniently for our current cultural obsession with identity politics), nerd-ness and bro-ness do not fall neatly within clearly identified boundaries of specified human communities. There are individual variations, there are community sub-groupings, and there are temporarily adopted behaviors that blur the picture. Within investment banking, for example, the tendency toward bro-ness tends to be larger in the capital markets division and, within that grouping, most strong among salesmen and traders. These are often the closest you will find to the backslapping, hail-fellow-well-met stereotype of good looking, easygoing bros who would be happy to watch football on TV instead of running another ultramarathon with that nut job client Ted from Citadel. But these folks have good degrees and sharp intelligence and nontraditional pastimes, too. The days of the high school graduate or C student on the trading floor are long gone. You’ll also find derivatives structurers within large bank capital markets divisions who I wager even Messrs. Warden and Andreessen would have a hard time differentiating from hardcore hackers and computer geeks. That is because that is exactly what they are, or were, before they donned the button-down and chinos uniform of their chosen career.

There is also, at junior levels, a lot of bro-ish posturing done by male investment bankers early in their careers when they are young, single, and so overworked they couldn’t spend all the money they make if they tried. In the boom years before the Crash, this often manifested itself in the desire to live the “models and bottles” lifestyle, where 23- and 24-year-old men went hunting for pretty women and expensive booze and mostly made obnoxious fools of themselves instead. (Of course that lifestyle—or, rather, the aspiration to that lifestyle which mostly generated exaggerated stories and outright lies—is long gone.) It still takes the form of the aggressive one-upmanship and macho dick measuring³ junior bankers haze each other with when they feel insecure, which is almost always. You only have to overhear this once, however, to realize it is nothing more than a bunch of awkward, self-conscious nerds who didn’t get laid enough in high school desperately trying to convince each other they did.

Of course, for some of us, this never changes.

* * *

Stepping back a little, I think I can assert without meaningful contradiction that, far from being limited to nerds or geeks or some other subculture, having a traumatic adolescence is almost universal. Everybody who makes their way through high school is, in some more or less meaningful way, faking it. Everybody wants to belong, be liked, fit in, and be popular. Everybody. It is human nature at that age, when we are still trying to define who we are. Why shouldn’t we look to our peers and popular culture for affirmation? But very few of us get it, to our satisfaction, so we channel our energy and ambition and hurt into schoolwork, or programming, or geeky hobbies instead. And many of us turn that sublimated effort into meaningful careers in geeky, nerdy fields like technology or finance, and find ourselves many years later, grown up, to be the socioeconomic successes we never dreamed we could be when we looked longingly at the cheerleaders and football players we could never have or be.

There is no cure for adolescence but to grow up. There is, however, a cure for adolescent trauma: get over it. And don’t use it as an excuse to oppress or traumatize others.

Unless, of course, you are Carl Icahn.

Related reading:
Laurie Penny, On Nerd Entitlement (New Statesman, December 29, 2014)
Pete Warden, Why nerd culture must die (Pete Warden’s Blog, October 5, 2014)
Taxonomy (January 14, 2007)

¹ Also known as the internet.
² Please, before you embarrass yourself, let me stop you before you argue there are very specific definitions for terms such as “nerd,” “geek,” “bro,” and the like. Really? You want to go there? Trust me: you don’t. Go back to arguing about lightsaber construction methods on the Star Wars wiki instead.
³ About pivot tables in Excel and PowerPoint formatting, no less. I ask you.

© 2015 The Epicurean Dealmaker. All rights reserved.

The Morning After

noreply@blogger.com (The Epicurean Dealmaker) — Thu, 01 Jan 2015 14:02:00 +0000

Frans Hals, The Laughing Cavalier, 1624

There is an inn, a merry old inn
beneath an old grey hill,
And there they brew a beer so brown
That the Man in the Moon himself came down
one night to drink his fill.

The ostler has a tipsy cat
that plays a five-stringed fiddle;
And up and down he runs his bow,
Now squeaking high, now purring low,
now sawing in the middle.

The landlord keeps a little dog
that is mighty fond of jokes;
When there’s good cheer among the guests,
He cocks an ear at all the jests
and laughs until he chokes.

They also keep a horned cow
as proud as any queen;
But music turns her head like ale,
And makes her wave her tufted tail
and dance upon the green.

And O! the rows of silver dishes
and the store of silver spoons!
For Sunday there’s a special pair,
And these they polish up with care
on Saturday afternoons.

The Man in the Moon was drinking deep,
and the cat began to wail;
A dish and a spoon on the table danced,
The cow in the garden madly pranced,
and the little dog chased his tail.

The Man in the Moon took another mug,
and then rolled beneath his chair;
And there he dozed and dreamed of ale,
Till in the sky the stars were pale,
and dawn was in the air.

Then the ostler said to his tipsy cat:
“The white horses of the Moon,
They neigh and champ their silver bits;
But their master’s been and drowned his wits,
and the Sun’ll be rising soon!”

So the cat on his fiddle played hey-diddle-diddle,
a jig that would wake the dead:
He squeaked and sawed and quickened the tune,
While the landlord shook the Man in the Moon:
“It’s after three!” he said.

They rolled the Man slowly up the hill
and bundled him into the Moon,
While his horses galloped up in rear,
And the cow came capering like a deer,
and a dish ran up with the spoon.

Now quicker the fiddle went deedle-dum-diddle;
the dog began to roar,
The cow and the horses stood on their heads;
The guests all bounded from their beds
and danced upon the floor.

With a ping and a pong the fiddle-strings broke!
the cow jumped over the Moon,
And the little dog laughed to see such fun,
And the Saturday dish went off at a run
with the silver Sunday spoon.

The round Moon rolled behind the hill
as the Sun raised up her head.
She hardly believed her fiery eyes;
For though it was day, to her surprise
they all went back to bed!

— J.R.R. Tolkein, The Fellowship of the Ring

Happy 2015. May your new year be a pleasant, safe, and prosperous one.

© 2015 The Epicurean Dealmaker. All rights reserved.

Greatest Hits of 2014

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 27 Dec 2014 14:45:00 +0000

“I think it’s just elegant to have an imagination. I just have no imagination at all. I have lots of other things, but I have no imagination.”

— The Seven Year Itch

Yes, O Dearly Beloved, it’s that time of year again. Time to dust off the circuit boards of the dedicated Google Analytics server farm for this two bit opinion emporium and determine which of my 37 beautiful children attracted the most attention from you delightful readers, spambots, and web crawlers in the Year of Our Lord Two Thousand and Fourteen. As I have explained before, this may be the last year I bother to conduct such a shameless exercise of self-congratulatory back patting—and I have already graced these archives with an All Time Greats victory lap—but I am nothing if not attentive to the proclivities of the three obsessive compulsives among you who could not rest if I did not. (And of course that little jolt of ego gratification I receive from enticing a few hundred more of you to click on these links one more time.)

Anyway, the way these things work should not be a mystery to you by now, so I will stand discretely in the back while you explore TED’s very own People’s Choice awards. I hope you enjoy them, but if you do not, well, you’re probably not my demographic anyway.

THE CANON, 2014 Edition:

1) A Fine Disregard for the Rules (January) — A cabal of the largest investment banks on the planet joined together this year and last to institute policies designed to limit and control the near-legendary workloads imposed on their most junior professionals. In this post, your Guide to All Things Workaholic, Finance Edition explains just why it is these poor slobs work such long hours. I won’t give away the punchline here, but you may safely assume it has something to do with client service.

2) Where Did He Learn to Negotiate Like That? (August) — There are right ways and wrong ways to employ investment bankers when you want to sell your company. The idiot savants at online real estate company Trulia gave us a master class in the latter, while simultaneously demonstrating that it can be dangerous to negotiate with professional negotiators.

3) A Cure Worse Than the Disease (August) — A lawyer took to the pages of peHUB.com to explain, among other things, when and why to hire a mergers & acquisitions advisor to sell your private company. I took to my own to provide what I believe to be a more comprehensive, helpful, and only mildly self-promotional gloss.

4) Touring Test (June) — A tendentious screed prompted by more idiocy emanating from the incontinent bowels of Silicon Valley, some of whose boosters and visionaries continue to argue, against all evidence and two decades of wasted technology spending to the contrary, that in-person business meetings can and should be dispensed with in favor of remote, virtual, “telepresence” substitutes. I calmly remind my readers that meetings—and indeed business itself—still actually do involve those pesky entities known as people, most of whom continue to prefer to interact with their counterparts in person, rather than in the pixellated confines of World of Warcraft. For good reason.

5) This Situation Absolutely Requires a Really Futile and Stupid Gesture (March) — Gawker editor Hamilton Nolan Is Full of Shit, Part 572. I think it had something to do with hedge fund managers and their earnings this time. Moral: populist polemics based on a fundamental untruth may¹ attract page views, but they only make you look stupid to the people who matter.

6) Even Cowgirls Get the Blues (February) — Two of the dead horses I most like to beat in these pages—junior banker working hours and women’s career challenges in my industry—come together in one convenient pile of moldering horseflesh for me to flail away at. You may watch the proceedings with amusement from the sanitary safety of your virtual armchair.

7) You Go First (July) — The private equity industry has always acted like a tick on the dog of investment banking when it comes to sourcing and hiring its junior professionals. Now that the tick is approaching the size of the dog, the old accommodation between the two symbionts is breaking down. I object.

8) All Hail and Farewell, the Trophy Kids (August) — Apparently the cream of America’s youth is spurning Wall Street for the glittering garages of Silicon Valley. I say good riddance, and helpfully explain why.

9) The School of Hard Knocks (April) — That’s the transcript I want to see from my job applicants, not a 4.0 GPA meal ticket from a degree mill on the Charles River. I fear I am fighting an inexorable tide, however.

10) Oop. Time, She’s Up (September) — That’s right: after almost eight years of an on-again, off-again tempestuous relationship with you Darling People, I am bored. As you might suspect, even my breakup texts are overlong. Time to stop phoning it in.

Cheerio.

Previous entries in this series:²
TED’s All Time Greatest Hits
Greatest Hits of 2013
TED’s Greatest Hits of 2012
TED’s Greatest Hits of 2011
TED’s Greatest Hits of 2010
Greatest Hits of 2008
More Works to Look On and Despair (August 2007)
Look On My Works, Ye Mighty, and Despair! (May 2007)

¹ Sigh, I know: they do. But let me entertain my cherished illusions, please. It’s my blog, after all.
² Apparently I never did a greatest hits collection for 2009. Sorry.

© 2014 The Epicurean Dealmaker. All rights reserved.

Show Me the Money

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 02 Dec 2014 17:59:00 +0000

“Money changes everything.”

— Some guy, probably without any money

Andrew Ross Sorkin, access journalist extraordinaire and alleged shill for the Great and Good,¹ put up a sensible op ed this morning to which I thought I would contribute a few brief supporting remarks. It seems Mr. Sorkin has taken somewhat of a shine to Antonio Weiss, a successful Lazard investment banker whom the current Administration has advanced as its candidate for under secretary of the Treasury for domestic finance, and he has been defending this paragon of sharp-dressed competence against detractors great and small.

Today’s fresh character assassination outrage comes from the capitalist shills [sic] at the AFL-CIO, who have apparently addressed a letter to the boards of several Wall Street banks which takes umbrage at the policy, to be enjoyed by Mr. Weiss among others, that employees leaving their firms for government service can take their unvested pay with them:

Why, the letter asked, do banks routinely pay out special compensation packages to executives who leave to take government jobs when those packages were intended to retain them?

“Unless the position of these companies is that this is just a backdoor way to pay off a newly minted government official to act in Wall Street’s private interests rather than the public interest, it is very difficult to see how these policies promote long-term shareholder value,” the letter declared.

Now Mr. Sorkin waxes poetic and high minded in response to this challenge, nattering on primarily about how we should encourage banks and other employers of bright, shiny, would-be technocrats to doff their gilded yokes of service to Mammon and don the austere chains of public service to the rest of us. He assures us that the interlocking web of influence, conventional group think, and apparent if not actual conflict of interest such revolving door practices engender are indeed problematic, but that the net gain of brilliant, accomplished, successful financiers to the government payroll is worth it, and the aforesaid conflicts can be managed with an unburdensome modicum of care and attention. This is all well and good, and even Your Altruistically Challenged Correspondent can recognize the merits of this argument in the chilly chambers of his frozen heart, but it does not go far enough. As a result, Mr. Sorkin has no compelling response to Big Labor’s additional complaint—bless their capitalist-friendly hearts—that such policies represent a squandering of shareholder value. The thrust of his reply seems to be, yes, these policies cost shareholders money, but they probably help attract some additional members of the Best and Brightest who might have a few public-service-inclined bones in their sleekly coiffured bodies, so that must be a non-numerically-quantifiable Good Thing.

This is unnecessarily weak sauce. Let me explain.

* * *

The principal issue seems to be that our intrepid financial journalist and the shrill harridan of special pleading for labor share a common confusion concerning the payments in question to Mr. Weiss and other would-be servants of the public good. For one thing, they are not special payments at all, as in, “Well done you. Here’s a couple of million or so leafy simoleons to stack alongside your Rembrandts and ill gotten bearer bonds in reward for your selflessness. Remember us kindly.” Rather, when Lazard hands Mr. Weiss a check for twenty million smackeroos give or take on his way out the door, it will be releasing into his sweaty hands money he has already earned.

The distinction which Ms Slavkin Corzo draws between this and what Mr. Weiss, e.g., would receive should he instead choose to decamp from the mahogany clad offices of Lazard for some other investment bank—bupkis, plus a swift kick to the seat of the pants—while correct, misses the point. As Your Tireless Explicateur of All Things Compensatory has often explained on this site, investment bankers are commonly paid substantial portions of the mouthwatering bonuses you read about in the form of what is affectionately known in my industry as “funny money” or “toilet paper”; i.e., deferred compensation. Such deferred compensation usually takes the form of restricted stock which vests over some period of time, phantom stock units, stock options, deferred cash payments, or some other such bullshit which replaces freely spendable legal tender with a conditional promise by one’s employer to pay one the money one has earned in the past sometime in the future, depending.

To illustrate a simple case, a modestly successful senior banker might get “paid” $2 million for her moneymaking efforts over the year, but receive only $250,000 of that in the form of biweekly salary, $500,000 in a cash lump sum payable shortly after the turn of the year, and the balance of $1,250,000 in the form of restricted shares of stock in her employer which vest in equal installments over the next three years.² Now, should she be so rash as to decide to jump ship from her existing employer to a competitor before the stock she earned by making money for the firm and its shareholders vests, in almost every case she loses it entirely. Given that most bankers stay with their employers for several years and have this or similar pay regimes inflicted on them every year, you can understand that most senior bankers tend to have quite a substantial “nest egg” of deferred pay locked up in restricted shares that are subject to forfeit in such circumstances. This explains why, unless a banker is desperate to switch employers (or, like most Lehman bankers post crash, has unvested stock which is largely worthless anyway), she is likely to extract a large payment from her new employer which is designed to replace the deferred compensation she is giving up by jumping ship. Sadly for her, such replacement payments are almost always granted in the form of—you guessed it—restricted shares with deferred vesting. So, no matter whether she hops from bank to bank like a Mexican jumping bean or stays with one her entire career, a successful senior banker is likely to have accumulated several if not tens of millions of dollars of deferred pay for her pains. The only way off this treadmill is to die, retire completely from investment banking, or, yes, join the government or some other non-competitive corporate entity.

Seen in this light, the forfeiture of unvested pay which a banker suffers when she leaves for a competitor is not the avoidance of further payment but rather the recapture or clawback of previously earned and allocated compensation. Little Muffy got “paid” those two million clams because she made, let’s say, ten million clams for her firm and its shareholders. Those ten million clams were real, deposited and cleared cash money,³ which paid real creditors and light bills and lap dance club dues and which, after said normal course operating expenses and the government’s rake were creamed off the top, were distributed to shareholders in the form of dividends and/or retained capital. Little Muffy only got $750,000 of that munificence and was forced, mutatis mutandis, to extend the balance as a long term interest free loan to the company.⁴ Sure, the shareholders face eventual dilution when and if Muffy’s shares vest, but until this happens they haven’t really fully paid her for her services. Other things being equal, shareholders should be delighted when bankers resign to work for competitors, because all those unvested share awards are cancelled and they retroactively get all those bankers’ revenue production for below market rates.

Of course, other things often are not equal, and investment banks usually have to replace the departed bankers with new ones, sometimes from other firms for which they have to allocate a lump sum of restricted shares out of treasury that negates all the wonderful savings shareholders got from the resignations. In this respect, deferred banker compensation is sort of like a hot potato: you can pass it around, but somebody is going to have to hold it as long as the banker is working in the business.

* * *

Ergo, paying Mr. Weiss and any other loyal bankers who decamp from our industry’s fetid shores for the sweetness and light of public service (or some other employment which does not try to take money out of the mouths of investment bankers) harms shareholders virtually not at all. It does normally accelerate payment of any unvested shares or other deferred compensation, which eliminates the present value discount of deferral which shareholders otherwise enjoy, but in point of fact all such payments do is give their departing employees the pay the firm has promised them for work already done. It is a greedy and incontinent shareholder who cannot agree to that.

In fact, politically ambitious investment bankers who have a notion they might like to try public service eventually usually negotiate explicit conditions in their employment agreements up front to pay all unvested compensation in just such circumstances, and banks are happy to agree to them. It is no skin off their shareholders’ noses, it renders contractual the right thing to do, which is to pay your employees what you have agreed to pay them, and it may even generate some goodwill or at least friendly feeling in someone who might be leaning over the dais at a future Senate probe or showing up to your Executive Suite with a raft of burly auditors on Christmas Eve. It’s not bribery. It’s just good business. Plus, as Mr. Sorkin avers, it’s probably socially constructive as well.

Only an ungrateful son of a bitch of an investment bank shareholder cannot appreciate that. But I’m being redundant.

Related reading:
Andrew Ross Sorkin, Encouraging Public Service, Through the ‘Revolving Door’ (New York Times DealB%k, December 2, 2014)
Defending the Indefensible (September 22, 2012)
Five Pound Box of Money (February 9, 2009)

¹ Hey, even the Great and Good need positive PR. Besides, notwithstanding populist firebrands’ complaints, it does add materially to the public weal to have someone reporting directly from inside the belly of the Beast, and the Beast needs to give someone access to his belly for that to happen. What, you think John Mack was going to recount his conversations with Tim Geithner during the financial crisis to Yves Smith?
² Don’t get hung up on the bigness (or smallness, bless you Executive Committee members) of these numbers, children. Yes, even modestly successful investment bankers can make what in normal circumstances can rightly appear to be a metric shit-ton of money, but that is not the point of this illustration. Think about all that money tied up in restricted shares which little Muffy Megabucks thinks is rightfully hers for revenues and hopefully profits she already earned for her employer. Can’t do it? Never mind, then, you might as well switch over to BuzzFeed.
³ For clarity and simplicity I am assuming these revenues were really earned funds, like fees from closed M&A transactions or security underwriting. The same argument carries less force when the money a banker “earns” for the firm is, e.g., the calculated and booked net present value profit for a long-term trade which remains at risk for the entire term of the trade, as my colleagues on the sales and trading side of the industry are so fond of claiming.
⁴ The “principal” of which, by the way, is tied to the actual, fluctuating stock price of her employer’s shares, which can work either to her benefit or to her lasting despair (Lehman Brothers). Deferred stock is calculated as a number of shares at the time when compensation is set, not when the shares vest. The holder is exposed to changes in the firm’s stock price over the entire vesting period.

© 2014 The Epicurean Dealmaker. All rights reserved.

His Dark Materials

noreply@blogger.com (The Epicurean Dealmaker) — Thu, 27 Nov 2014 05:40:00 +0000

Joseph Wright, Arkwright’s Cotton Mills by Night, c. 1782

The best one can hope for as a human is to have a relationship with that emptiness where God would be if God were available, but God isn’t. … He’s not available because he’s not a being of a kind that would fit into our availability. … If God were knowable, why would we believe in him?

— Anne Carson

* * *
All religions [have] at least one common commandment: “Thou shalt not disfigure the soul.”

— Frank Herbert, Dune

* * *
Seems to me the place you fight cruelty is where you find it, and the place you give help is where you see it needed.

We have to build the Republic of Heaven where we are, because for us there is no elsewhere.

— Philip Pullman, His Dark Materials

Do not forget to build the Republic of Heaven where you are, my friends, starting with your family and friends this holiday season. Most of us have no more important work, and most of us will leave no more lasting legacy than this.

Happy Thanksgiving.

© 2014 The Epicurean Dealmaker. All rights reserved.

Regrets, I’ve Had a Few

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 23 Nov 2014 23:56:00 +0000

Auguste Rodin, Orpheus and Eurydice, 1893

Martin Blank: “I’m sorry if I fucked up your life.”
Debi Newberry: “It’s not over yet.”

— Grosse Pointe Blank

Why do we regret life choices? In retrospect, some are decisions with serious and long lasting consequences we make carelessly, hastily, or without due consideration to relevant factors clearly available to our decision making process at the time. They are important choices poorly made. These are good candidates for regret, because we think to ourselves, “If only I had thought more clearly, or taken more time, or investigated my options more carefully, I could have accomplished something important I would have wanted at the time and perhaps still do.” These are the kind where our overwhelming impulse is to kick ourselves for being so stupid, blind, or rash. And we are right to do so. If you are like me, Dear Readers, these are the decisions I cringe to remember, and for which my ears burn with embarrassment.

Others are choices we make deliberately, carefully, with all due attention to the facts as we know them, but that turn out to be wrong, or have unanticipated negative consequences which would have made us choose differently had we foreseen them. These regrets take the form, “If only I had known…” But these are properly weaker regrets, because they hinge on counterfactuals which we instinctively if not explicitly realize were not in our control: information which would have made us change our minds was hidden or unavailable to us, or—a special case of the foregoing—future conditions which we relied upon in making our decision changed after we decided, thereby undermining our intent. Human beings operate with bounded rationality, and even the best and most conscientious decision maker can be foiled by unknown (and perhaps unknowable) data and the vicissitudes of an uncertain future. The consequences may be just as bad, in retrospect, as those arising from a bad decision poorly made—or even worse—but it is pointless to beat yourself up too much for choices you made without considering information completely unavailable to you. Someone who gives more than a passing shrug of regret for the abandoned winning lottery ticket they failed to pick up off the street has their priorities and sense of the possible all messed up.

Still others are good decisions, carefully made, incorporating a complete set of relevant data and good anticipation of future developments, that we later come to regret because we discover we no longer want what we thought we did at the time. Perhaps these are just another subset of the second kind, where the unknown facts we did not incorporate into our decision process are future changes to our values or priorities. But these regrets are often the most troubling, because we are stuck with bad consequences we did not anticipate for which we can blame no-one but ourselves. Nobody hid any data from us, we weighed the pros and cons carefully, and the future played out just as we expected, but now the successful results of our decisions prevent us from realizing other desires or values that are just as or more important to us. This kind of regret often is a natural consequence of the normal process of aging, as young people make important and often irreversible life decisions they later come to regret as older individuals.

* * *And so we get examples like this, where a 46-year-old banker complains on Reddit that his choices as a young man—for security, wealth, and a successful career—have resulted in a broken marriage, estrangement from his son, and the abandonment of cherished dreams of writing, travel, and adventure he had when he was young. According to his story, he did not make choices rashly or irresponsibly; if anything, his complaint seems to be based in part on his opinion that he chose too cautiously. I will not judge this man’s life choices or his current situation, other than to observe that perhaps his real faults are blindness and inattention.

Why should anyone expect that decisions once made should never be revisited or reexamined in light of changing circumstances or changed desires? Even in our blessed state of deferred decision making in the developed world, many of us begin to pick mates, careers, and life paths while we are still in our twenties, when maturity-wise we are little more than children. Not only should we expect our values and priorities to change with age and circumstance, we should be alert to the fact that many of the decisions we make will be impossible or very difficult to undo. This is naturally hard for young people—I speak from experience, having been one—since the general existential assumption of youth is that time is unlimited and life is one endless series of sequential possibilities. The notion that, for example, having and raising children will impose dramatic limitations on one’s freedom and possibilities for personal fulfillment for decades in one’s young and middle adulthood doesn’t even occur to most twenty-somethings, except in some sort of intellectual sense, which is to say: not at all.

Of course this lesson—and many others which cranky oldsters like me try to impart on a regular basis to succeeding generations—is almost always only learned by personal experience. I remember having gauzy, exciting dreams of adventure and possibility as a twenty-something myself. Most of them, in retrospect, were pretty unrealistic, naive, or just silly. I don’t regret not trying to pursue them now because I realize they likely would have been a disappointing waste of time. In contrast, the adventure and excitement in my actual life have come from the commitments I have made, like marriage, children, and a career, because almost all of them required, in some form or another, a blind leap of faith into the unknown. Has it all been peaches and cream? Absolutely not, but it has been an adventure.

And, lest you sink into a youthful funk contemplating an endless vista of diaper changing, weekend soccer games, and college application trials as the entirety of your ineluctable fate, take heart. The good news about adulthood is that is doesn’t necessarily crush your dreams. It just gives you new ones. You just need to be alert to discovering them.

* * *

Of course, a looming sense of mortality can be salutary, too. There’s nothing like lagging energy, mysterious aches and pains, and strange growths discovered in the mirror to drum into your consciousness that your time here is limited and precious. Adventure and excitement can often be found right in your own backyard, if you know where to look:

Life is what happens to you while you’re busy making other plans.

— John Lennon

Hey, I warned you it all isn’t peaches and cream.

Related reading:
Turn the Page (December 31, 2011)
Walking Song (December 18, 2011)
Can’t Buy Me Love (April 29, 2012)

© 2014 The Epicurean Dealmaker. All rights reserved.

What Is It Like to Be a Banker?

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 19 Nov 2014 02:35:00 +0000

Conscious experience is a widespread phenomenon.

— Thomas Nagel, inveterate optimist

Whilst conducting primary research into the ontological foundations of metaphysical epistemology recently, O Dearly Beloved, Your Dilatory and Shockingly Remiss Correspondent happened upon a previously unpublished draft of Thomas Nagel’s seminal paper, “What Is It Like to Be a Bat?” I found upon examination of the disintegrating foolscap moldering in dank archives that this eminent philosopher had initially attempted to frame his gedankenexperiment with an empathic exercise even more challenging than imagining himself to be a member of the genus Microchiroptera. Given its patent interest for the history of analytical philosophy and its relevance to issues of concern cognate to this blogsite, I thought I would share the pertinent excerpt with you:

I assume we all believe that bankers have experience. After all, they are human beings, and there is no more doubt that they have experience than that accountants or baristas or firemen have experience. I have chosen bankers instead of lawyers or politicians because if one travels too far down the phylogenetic tree, people gradually shed their faith that there is experience there at all. Bankers, although arguably more closely related to us than those other examples, nevertheless present a range of activity and a sensory apparatus so different from ours that the problem I want to pose is exceptionally vivid (though it certainly could be raised with other species). Even without the benefit of philosophical reflection, anyone who has spent some time in an enclosed space with an excited banker knows what it is to encounter a fundamentally alien form of life.

I have said that the essence of the belief that bankers have experience is that there is something that it is like to be a banker. Now we know that most bankers (investment bankers, to be precise) perceive the external world primarily by money sense, or moolah-location, detecting the reflections, from monetary instruments or securities within range, of their own rapid, subtly modulated, high-frequency shrieks. Their brains are designed to correlate the outgoing impulses with the subsequent jingling or rustling of exchangeable claims to value, and the information thus acquired enables bankers to make precise discriminations of denomination, fungibility, composition, and theft-prevention protections comparable to those we make by vision. But banker money sense, though clearly a form of perception, is not similar in its operation to any sense that we possess, and there is no reason to suppose that it is subjectively like anything we can experience or imagine. This appears to create difficulties for the notion of what it is like to be a banker. We must consider whether any method will permit us to extrapolate to the inner life of the banker from our own case, and if not, what alternative methods there may be for understanding the notion.

Fortunately for the history of analytic philosophy, Professor Nagel apparently abandoned this initial foray as unworkable and, frankly, too outrageous and incomprehensible for anyone but specialists in the study of Homo investmentbankerensis. His revised paper, reframed to less ambitious dimensions, seems to have gone on to some renown, notwithstanding his execrable timidity.

Fortunately for you and everyone like you, I am led to believe there is a minor blogsite located somewhere in cyberspace which tackles these recondite issues head on. Perhaps you can drop me a postcard if you find it.

By the way, is that a $20 bill in your pocket?

© 2014 The Epicurean Dealmaker. All rights reserved.

Quis Custodiet Ipsos Custodes?

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 02 Nov 2014 23:55:00 +0000

Auguste Rodin, The Age of Bronze, 1876

“If you meet a thief, you may suspect him, by virtue
of your office, to be no true man; and, for such
kind of men, the less you meddle or make with them,
why the more is for your honesty.”

— William Shakespeare, Much Ado About Nothing

Francine McKenna of re: The Auditors recently expressed her dismay that the Big Four accounting firms have continued to be noticeably remiss about engaging reputable accounting firms to audit their own in-house broker dealer arms. The litany Ms McKenna recites of well-known and less-than-well-known failures and deficiencies public accounting firms have been accused of by the PCAOB and the SEC concerning audits of third party broker dealer clients is certainly eye-opening, and it does not give the casual reader much confidence they are sufficiently capable and diligent in this area. However, Ms McKenna’s central concern is a different one: in order to provide legally mandated audits of their own broker dealer units, the Big Four must hire unrelated third party audit firms, and the firms they have hired are tiny, no-name, no-account nobodies.

This, on its face, appears to worry Ms McKenna, and it is reasonable to presume it should worry the rest of us who are less informed about the ins and outs of public accounting than she. However, while I profess absolutely no expertise or credentials in the area of public accounting, I do have an insight into the facts of the matter which may allay some of Ms McKenna’s and her audience’s concerns.

For one thing, as a lawyer who read her post inquired, the curious among you Delightful People might wonder why public accounting firms have broker dealer subsidiaries in the first place. Well, the answer to that—notwithstanding the corporate doublespeak Ms McKenna cites from the firms in question—is quite simple: they like to do investment banking. They like the fees, they like the prestige, and they are often thrown into situations where clients do hire them to provide capital raising or M&A advice. In particular, the Big Four accounting firms have over the years developed a huge and thriving business providing financial due diligence, accounting, and audit services to private equity firms in connection with the latter’s frenetic buying, managing, and selling of companies. Private equity firms, the cognoscenti among you may recall, are paragons of corporate outsourcing, and because they normally consist of three ex-investment bankers, a part-time bookkeeper, and the bookkeeper’s dog, they must employ an army of outside lawyers, consultants, and advisors every time they want to do a deal. Chief among these, of course—save the ineluctable lawyers—are accountants, since virtually none of the private equity professionals are qualified accountants, either (nor can they be bothered to take time from dealmaking to tot up balance sheets, income statements, or other such trivia).¹

Private equity firms are occasionally willing to hire accounting firms as deal advisors in addition to their accounting duties because 1) what the hell, they’re already neck deep in the numbers anyway, 2) they may owe the accounting firms some love for the last ten deals which blew up and for which the PE firm accordingly stiffed them on their accounting fees (“We’ll make it up to you next time”), and 3) they’re normally much cheaper than real investment bankers. So Big Four accounting firm partners are always wheedling and cajoling their financial sponsor clients to let their pet investment bankers “do something,” and sometimes the PE guys let them. By the same token, relationship managers at public accounting firms are always looking to soak their corporate audit clients for additional fees, and the occasional corporate client decides to use his audit firm’s in-house bankers to raise some financing or do some small acquisition or divestiture, often for similar reasons to the PE guys.²

* * *

Now the trick is, of course, that if you decide to offer M&A advice or capital raising services to anyone, including PE firms and corporate clients, the redoubtable SEC requires you by law to register as a broker dealer. This is based on the notion, as I have explained elsewhere, that such services normally entail recommendations concerning the purchase and sale of securities, which is the third rail of financial market regulation in this country. Unfortunately, the law currently makes no distinction between a small band of semi-retired corporate development guys who advise on one or two deals per year and a globe-straddling colossus like Goldman Sachs. The former can just as well operate out of a suitcase. The latter not only advises on billions of dollars of M&A and raises billions of dollars of capital for its institutional clients, but also maintains client accounts, handles funds, and does all sorts of other security-related things for a much broader range of retail and institutional clients. Both are, de jure, “broker dealers,” and both require annual audits.

But if all you do is agency business like advising institutional clients on M&A and raising private debt or equity funds from institutional clients, the types of things which the SEC wants to check you are doing or not doing are relatively few and uncomplicated. For example, they want to know whether you are taking custody of or handling client funds at any point (normally no) or, if you are raising funds from institutional investors, you have controls in place to make sure they are indeed qualified for the deals you offer. They want to make sure you have written policies and procedures and adequate capital to support the business you conduct. But the financial complexity of a pure agency advisory business is very low. You have fee revenue, compensation expense, unreimbursed marketing and T&E expense, and other general and administrative expenses. The balance sheet and retained capital you require to run such a business is minimal. From an auditor’s perspective, it is a pretty darn simple business to audit.

And this, as I understand it, is what the broker dealer units of the Big Four accounting firms do. They are not taking custody of client funds, investing money on behalf of customers, or maintaining large sales and trading platforms which operate across multiple geographies and markets. Notwithstanding the size and complexity of the Big Four, their broker dealer platforms have got to be pretty trivial. Accordingly, it makes sense that they have chosen to hire pissant little audit firms to satisfy their SEC-mandated requirements because 1) their businesses are simple enough to be adequately audited by a couple CPAs operating out of a strip mall and 2) the strip mall CPAs are going to be a hell of a lot cheaper than a larger firm. This latter point is important since it is likely—and Ms McKenna confirms it in the case of PwC—that most of these broker dealer arms are either losing money or making a pittance.

Now if this is not true, and Ernst & Young is running a hedge fund like MF Global inside its broker dealer or selling restricted biotech warrants to unqualified widows and orphans, then obviously none of the above is true or adequate. But if that is the case, I think E&Y and the SEC have a much bigger problem than Ms McKenna has tentatively identified.

Related reading:
Francine McKenna, When Big Four Audit Firms Need an Audit They Choose Cheap (Medium, October 14, 2014)
Francine McKenna, Update: The Shoemaker’s Children… The Big Four And Their Own Broker-Dealers (re: The Auditors, October 27, 2014)
In Loco Parentis (April 13, 2014)

¹ This is in sad contrast, regular readers of these scribblings will recall, to private equity firms’ endemic reluctance to hire M&A advisors like Yours Truly for the combined reasons that 1) PE professionals believe they can do deals themselves and 2) doing deals, unlike accounting, is fun.
² In the UK and Europe, where I understand public accounting firms have a closer historical and statutory advisory relationship to their clients, they actually maintain a relatively robust position in the advisory league tables for mid-sized and smaller deals, unlike their poorer American cousins. When it comes to big public deals, however, investment banks dominate there as they do here.

© 2014 The Epicurean Dealmaker. All rights reserved.

Courtly Love

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 28 Oct 2014 03:37:00 +0000

Contrary to the cynicism that can pervade discussions of [mergers and acquisitions], many top level M & A advisors have a genuine concern about the integrity of large scale transactions and a desire for the fiduciaries involved to serve the interests they represent in a good faith and effective way. This is not to say that they do not seek to advance the interests of their clients in obtaining legitimate economic advantage, but they do want the game to be a fair one.

— Leo E. Strine, Jr., Chief Justice, Delaware Supreme Court ^1,^2,³

¹ While I appreciate Chief Justice Strine’s sentiment and respect for the basic integrity and desire for fair play which does indeed hold sway among the large majority of professional advisor participants in M&A processes, I find his proposal that we make our lives—and those of our clients—before his and other benches easier by documenting in much greater detail the twists and turns of our recommendations and analyses in medias res of transactions to be both impractical and naive. Surely Chief Justice Strine, among all jurists, must appreciate the role accident, error, and chance play in almost every complex process such as a merger or acquisition and how, even when said twists and turns are faithfully and comprehensively memorialized the twin imps of imperfect memory and hostile interpretation can confuse and bedevil the faithful interpretation of the facts of the matter. I suspect Mr. Strine, being both professionally empowered and constitutionally predilected for the role of fact finder and detective, simply prefers a clearer trail of evidence to allow him to judge the facts of the case properly and render more equitable judgments. However, I also suspect virtually no internal or external investment bank counsel or deal lawyer of any kind will be remotely interested in providing more potential fuel for the fires of devious and aggressive plaintiffs’ counsel for the sole purpose of making Justice Strine’s and his colleagues on the bench’s jobs easier. After all, that is why they pay him the big bucks and solicit him to speak at ABA conferences: because his job is difficult. Plus, we never know when some bozo will relocate litigation jurisdiction away from the Halls of Justice and Light in Delaware to some one-horse hick town in Texas where the judges don’t even know how to read PowerPoint. I’ll go out on a limb and reckon his suggestion is not gonna happen anytime soon. It was a nice try, though.
² This quote also reminds me of an excellent article by philosopher David Papineau, who wrote about the distinction which can be drawn between the rules of the game and the notion of fair play in both sport and politics. I think a similar analysis could be performed for the highly ritualized, rule bound competition which is mergers and acquisitions. Maybe if you’re nice to me and send me a fruit basket I’ll undertake such an explanation one day.
³ Does it count as a blog post if the chief substance of your remarks lies sequestered in footnotes? Does it count as a speech? Did Chief Justice Strine read each and every footnote as well when he delivered his speech? These are some of the mysteries which consume my restless nights.

© 2014 The Epicurean Dealmaker. All rights reserved.

Sunday Reading from the Archives

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 19 Oct 2014 17:20:00 +0000

Edward Hopper, Early Sunday Morning, 1930

“Then I need say no more,” said Celeborn. “But do not despise the lore that has come down from distant years; for oft it may chance that old wives keep in memory word of things that once were needful for the wise to know.”

— J.R.R. Tolkein, The Fellowship of the Ring

Periodically, O Dearly Beloved, I take a leisurely stroll through the carefully stacked and organized pixels of my back catalogue, clicking from link to link in a solipsistic journey of rediscovery. Occasionally such wanderings illuminate a consistent intellectual preoccupation of mine, which the bored and underemployed among you might find provocative or merely amusing to waste your time with on a leisurely Fall Sunday morning.

Today’s theme, I suppose, could be described as the necessity for us, as both individuals and as members of society, to accept our fate, to acknowledge the limits of our agency and the extent of our ignorance, and to accept our mutual entanglement with the fortunes of our fellow human beings. In other words, perhaps: Humility.

I like these pieces of mine, even though (or perhaps perversely because) they have not been among my most popular. I hope you find something to enjoy or even make you think. Cheers.

• All Together Now – Steve Randy Waldman has said opacity is integral to modern finance. I argue that opacity—and the information asymmetry which it reveals and which creates it—is an emergent feature of all sorts of social functions in complex societies, including finance. Information asymmetry and its associated rents are a convenience tax which members of a society implicitly accept when they agree to the division of labor necessary in complex social communities. Accordingly, I do not believe they can be made to disappear anytime soon.

• Punished by Fate – C.J.F. Dillow despairs of the common man’s understanding of chance, declaring it irrational. In contrast, I believe folk notions of justice and fairness incorporate a very sophisticated understanding of our exposure to fate—good, bad, and indifferent luck—and rest upon a communitarian ethics of sharing such undeserved gifts and punishments. Rather than being evidence of ignorance, irrationality, or undeserved entitlement, the average person’s sense of fairness is a very sensible collectivist approach to the problem of just deserts in an uncaring universe.

• Occupy Galt’s Gulch – Continuing with the theme of communitarian ethics, Jim Manzi points out that “winners [in society] require shared resources produced by the losers.” I explore some of the implications of this notion in the context of just deserts for self-styled übermenschen who rely on the resources of society, the labors of their fellow citizens, and the uncontrollable vicissitudes of chance to create the conditions for their success, as filtered through the particular lens of American culture and society.

• To Whom It May Concern – Drilling deeper into the notion of individual success, I explain the exposure an aspirant in my industry has to luck, both good and bad, and some of the ways of coping with it. I suppose one could call this approach fatalism.

• It’s All How You Look at It – Wisdom is good, but it is no comfort. And there is no shortcut to it; no box of Wisdom waiting for you at the local WalMart. You must earn it yourself, with no guarantees that it will make any difference. Sorry.

• Prolegomena to Any Future Life – So what are you waiting for? Why are you reading this? You must change your life. Get to it.

Happy Sunday.

© 2014 The Epicurean Dealmaker. All rights reserved.

The Privy Counselor

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 11 Oct 2014 20:19:00 +0000

Diego Velasquez, Portrait of Pedro de Barberana, 1631

No! I am not Prince Hamlet, nor was meant to be;
Am an attendant lord, one that will do
To swell a progress, start a scene or two,
Advise the prince; no doubt, an easy tool,
Deferential, glad to be of use,
Politic, cautious, and meticulous;
Full of high sentence, but a bit obtuse;
At times, indeed, almost ridiculous—
Almost, at times, the Fool.

— T.S. Eliot, “The Love Song of J. Alfred Prufrock”

So The Blackstone Group decided yesterday to spin off its advisory business and merge it with Paul Taubman’s advisory “kiosk.” This is just the sort of relatively trivial exercise—the advisory group in question accounted for only 6.4% of Blackstone’s revenue and 2.1% of its economic income—that sets financial journalists’ and Wall Street pundits’ heads to nodding and chins to wagging, based almost entirely on the undeniable fact that Blackstone is big and important in the financial ecosystem.¹ But I must pop my head up from my hidey hole, if only briefly, to take issue with some of the hasty conclusions being drawn here. I promise to withdraw swiftly and silently at the conclusion.

First, I must disagree with William Alden that Blackstone’s actions somehow contradict prevailing wisdom on Wall Street:

For decades, it has been a deeply held belief among many of Wall Street’s giants that a multiplicity of business lines is superior to a more streamlined model.

No, the conventional wisdom on Wall Street is and always has been quite simple: do whatever makes the most money. This is actually quite a sensible, beautiful, adaptable, and flexible business strategy. Sometimes, in fact, it does encourage executives to add business lines to their firms when they believe those businesses will add revenue and profit synergies to their existing business while being profitable in their own right (i.e., earning a return on top of paying for the people, assets, and financing costs they require). But more often than not it entails creating new products or services within existing business lines (like derivatives within capital markets operations), or just hiring a bunch of clowns who can cover an industry or execute a kind of business you do not already perform. (A “business line” in my industry is frequently little more than a handful of guys with business cards and a budget.) Often, as in the current environment, it encourages senior executives to discard unprofitable business lines, assets, or personnel by shutting them down, selling them, or just firing the unprofitable clowns because they can’t make money anymore or regulators are forcing you to get rid of unapproved activities.

Certainly there is a sensitivity among senior executives in finance to the benefits of maintaining a portfolio of complementary business lines, wherein secular and cyclical variations in the fortunes of certain lines can offset the different variations of others, and often there is a corollary fondness for the diversification accomplished through sheer size alone (usually by executives of big firms, natch). But both these considerations take a back seat to the short-, intermediate-, and long-run profit contributions, both direct and indirect, by the business lines in question to the mother ship. You can suckle at the corporate teat for a little while in my business while you wait for conditions to turn, but patience in the Executive Suite runs out pretty quickly if you can’t pull your own weight over the intermediate and long term. And notice I wrote the business lines must be complementary: if they don’t have the ability to contribute revenue and profit synergies to other business lines or the firm overall, their chance of staying within the fold long term—whether at GigantoBank or Two Guys and a Phone, LLC—are pretty darn slim.²

Enforcing this strategy from the other direction, by the way, are the self-interested considerations of the personnel who run the business lines in question. If they calculate belonging to the mother ship does not enhance their own intermediate- and long-term earnings and personal wealth generation prospects (via subsidy in bad times and better pay in good times than they could achieve elsewhere), they have absolutely no hesitation to jump ship for sunnier shores. From the top of the firm to the bottom, very few successful people on Wall Street value their job title and business card more than the contents of their paycheck, and most of us act accordingly. Besides, managing a multiplicity of business lines is hard. Even Wall Streeters know we are crap at management.

* * *

So I think it’s fair to take Blackstone at their word when they say they are divesting their advisory business due to structural conflicts with their core asset management businesses. In other words, not only was the advisory business not contributing any meaningful profit or revenue to the main group (q.v. supra), but also belonging to Blackstone was throttling the advisory group’s growth and profit opportunities. One can see this clearly in their results, where the Restructuring group has advised on the lion’s share of the unit’s business this year, $32.4 billion worth of deals, versus the regular advisory group’s relatively paltry $4 billion. This makes sense, since restructuring advisory (think bankruptcy, turnarounds, and workouts) is its own special business, with a different set of clients (failing companies, creditor groups, distressed investors), revenue model (hefty monthly retainers versus deal success fees), advisors (lots of ex-lawyers with sharp elbows and fierce manners), and business cycles (naturally, they tend to do well when everyone else is flat on their backs). They should normally have few conflicts with Blackstone’s core asset management businesses, most of which tend to invest in healthy companies or assets. The major exception cited in the articles—their inability to advise Lehman on its bankruptcy because Blackstone’s real estate division wanted to bid on its assets—is the killer exception that proves both the rule and the magnitude of the potential conflict.

Given that conditions are booming in regular M&A markets, the lackluster performance of Blackstone’s corporate advisory business is telling. Because Blackstone is so big and so active in principal investing across private equity, real estate, securities, and other asset classes, they must constantly show up on one side or another of potential transactions which its advisory group would like to get hired for. Such direct conflicts will usually put the kibosh on Blackstone’s advisors getting hired, or at least severely limit their alternatives. And even if no direct conflicts obtain, many corporate clients and virtually all competing private equity firms and principal investors are no doubt reluctant to hire Steve Schwarzman’s trained killers to give them highly sensitive financial and strategic advice. I can’t help but think this goes double for the third leg of Blackstone’s advisory stool, which helps raise money for—wait for it—other asset managers.

The point, in other words, is that Blackstone divesting its advisory business has nothing to do with bucking a nonexistent trend on Wall Street to add business lines like barnacles on a freighter. Instead, it has everything to do with dumping business lines that add no value, subtract value, or fail to realize their own value due to inherent negative synergies resulting from persistent structural conflicts of interest with the parent company. In other words, it is business as usual.

* * *

However, and for the very same reasons, Schwarzman pulling the ripcord on his M&A bankers does not signal the start of an industry-wide trend of divesting advisory groups by integrated investment banks. For one thing, big integrated investment banks with sales and trading, securities underwriting, and corporate advisory practices like the C-suite access top M&A and industry coverage bankers give them. Because they talk to the CEO, the CFO, and occasionally the Board of Directors, they have access to a level of decision making at corporate clients that the debt capital markets bankers and derivatives structurers do not. (They tend to talk to Treasurers or their finance staff.) This means they can get access to bigger, more profitable debt and derivatives deals and valuable, profitable product to pump into the insatiable maw of their huge trading machines. Profitable equity underwritings are also CEO- and Board-level prizes to give, and M&A deals are just icing on a cake that does not require meaningful capital to be put at risk.

M&A and corporate finance bankers like belonging to big integrated investment banks, too, when things work as they should. For one thing, it gives them more deals and ideas to talk about with their clients than just the usual who-should-buy-whom rigmarole. For another, it allows them to deepen and institutionalize their firm’s relationship with important clients by establishing multiple touch points and ongoing dialogues between subject matter experts within the bank and counterparts at the client. For a third, having equity research analysts who cover their clients and target industries gives them an entrée and a credibility with clients they do not know, and a capability to underwrite profitable equity business for those they do.

But most importantly, having M&A and industry bankers gives integrated investment banks an excuse to deliver ideas, industry and client insight, and all-important deal flow to the biggest-paying class of clients on Wall Street: private equity firms. While it is well known that private equity firms do not like paying M&A advisors for advice—usually because, rightly or wrongly, they think they know at least as much or more as bankers do about companies, deal-doing, and opportunities—they absolutely love paying investment banks to supply and arrange leveraged loans and high yield debt to finance buyouts of target companies. And banks love this too, because it is both huge and hugely profitable business. PE firms are usually happy to hire investment banks to sell their portfolio companies or take them public upon exit, too, although they tend to favor the banks which brought them the investment in the first place, financed it, and or smothered them with loving attention and juicy new buyout opportunities in the meantime.

So no wonder Blackstone ejected their M&A advisors. Not only can’t they offer the biggest and best paying clients on Wall Street (or anyone else) access to highly profitable leveraged lending, IPOs and equity underwriting, or sales and trading for securities and derivatives (because Blackstone Mère does not offer them), but also the biggest and best paying clients on Wall Street have no interest in hiring them because 1) they don’t value the advice they do have to offer and 2), duh, they work for one of their biggest competitors. I mean, if you could somehow engineer a similar set of constraints for Goldman Sachs’ M&A department, you can bet dollars to donuts the entire group would be camped out on West Street selling pencils before lunchtime.

* * *

Lastly, I have to I disagree with Jeffrey Goldfarb, too. I don’t think this action will start any powerful trends toward consolidating independent M&A advisors like the new PJT-Blackstone Advisory spinoff or even any significant acquisitions of same by larger financial institutions. For one thing, there are only so many synergies and complementarities one can generate in a homogeneous business line like M&A advisory or restructuring before negative returns to scale begin to kick in. At the end of the day, firms like PJT-BA, Moelis, Greenhill, and Evercore are really just a loose collection of fiercely independent, egotistical rainmakers who focus almost entirely on mergers & acquisitions for corporate clients. There isn’t a lot of infrastructure or shared assets to leverage, and there are no complementary business lines like securities underwriting, derivatives structuring, or sales and trading to juice the vig. Managing an advisory boutique is almost exactly like herding a passel of recalcitrant cats, and in my experience, the more the cats, the harder the shepherd’s job becomes.

Similarly, the likelihood a large commercial or foreign bank would snatch up any of these independent advisory shops should be limited by sheer common sense. For one thing, if the acquirer does not already have most of the key complementary underwriting and securities businesses listed above, adding a costly team of pinstriped M&A advisors is going to be an expensive exercise in cultural frustration and no synergy. Adding such capabilities after the fact would be even more expensive and less reversible, since those businesses require real assets, infrastructure, and permanent fixed costs that dwarf those required by the usual M&A department. For another, the history of such acquisitions argues more eloquently than I can against it.

* * *

For Steve Schwarzman, who has not paid noticeable attention to his old advisory business for years and who probably needed to be reminded by Tony James that Blackstone stilled owned it, the motivation for getting rid of the division is clear. He no longer wants or needs to be privy counselor to captains of industry or titans of finance.

It is many years since Steve Schwarzman has considered himself to be—and rightly so—a king in his own right.

Related reading:
Kiel Porter, David Carey, and Devin Banerjee, Blackstone to Spin Off Its Advisory Business With Taubman (Bloomberg, October 10, 2014)
William Alden, Shunning Wall Street Norms, Blackstone to Spin Off Its Advisory Group (DealBook, October 10, 2014)
Jeffrey Goldfarb, Blackstone’s Move Could Set Off a Trend (DealBook, October 10, 2014)
L’État, c’est moi (February 12, 2007) — Steve Schwarzman, Rex
Go West, Young Sheik (September 12, 2007) — Foreign bank acquisitions
Oxymoron (October 13, 2007) – Investment banking “management”
It’s Not the Meat, It’s the Motion (July 15, 2009) — Advisory boutiques

¹ There is perhaps an ancillary motivation derived from investment bankers’ unwarranted glamour and notoriety due to their current popular role as B movie villains in our global financial crisis soap opera. But you already knew that.
² This is not to deny that there are easy returns to scale (to a point) within business lines. Two Guys and a Phone, LLC would likely become much more profitable if it were One Hundred Guys and Several Phones, Inc., if only because they could share resources, support personnel, purchasing synergies, and enhanced marketing and sales generation prospects by looking bigger and hence more reputable to their potential clients, who are often big and diversified themselves. But these cost and revenue synergies often do not obtain between business lines that each have their own separate and different operating structures, client bases, and external market reputations. And past a certain point, scale and diversification can hurt you. The only thing belonging to GigantoBank ever did for me was open the door to an occasional new client who took a meeting because they were afraid GigantoBank would squash them (or more likely revoke their credit line) if they didn’t. A few others refused to meet with me because that is exactly what GigantoBank had already done.

© 2014 The Epicurean Dealmaker. All rights reserved.

Farewell, Ghafla Distraction

noreply@blogger.com (The Epicurean Dealmaker) — Fri, 03 Oct 2014 23:54:00 +0000

“Aha! Now we see the violence inherent in the system!”

— Monty Python and the Holy Grail

Yes, it’s true: I’ve left Twitter.

No special reason. All of a part with my reasons for terminating this blog,¹ which boil down to being tired of it. I no longer get enough out of the service to merit the near constant immersion and distraction which it seems to elicit from me. I have better uses for my time. And the more substantive readings and links of interest which used to attract me I have sourced otherwise through RSS feeds, so I no longer need to wade through reams of banal tweets on unemployment data, fluctuating bond yields, and the latest outrage du jour of anarcho-social-media-ites to find them.

Of course I am sorry to leave those few friends I have made on Twitter behind. But let’s be frank: there aren’t that many of you, and all of you will get along just fine without me. Besides, if you’re a true friend who’s not a complete mental incompetent, you already know or can find my email address, which remains the same. Those of you who can’t, well, there’s always Kim Kardashian and Justin Bieber. Like your parents, they will always love you and never leave you.

No, really.

¹ And no, this does not count as a blog post, except in those pathetic excuses for autofellation some of you frequent elsewhere. My posts have substance. This is a notice, for pete’s sake.

© 2014 The Epicurean Dealmaker. All rights reserved.

TED’s All Time Greatest Hits

noreply@blogger.com (The Epicurean Dealmaker) — Tue, 30 Sep 2014 02:44:00 +0000

The person who experiences greatness must have a feeling for the myth he is in. He must reflect what is projected upon him. And he must have a strong sense of the sardonic. This is what uncouples him from belief in his own pretensions. The sardonic is all that permits him to move within himself. Without this quality, even occasional greatness will destroy a man.

— Frank Herbert, Dune

I have used the preceding epigraph before, as some of you Delightful Readers may recall. It is a versatile and thought-provoking sentiment. Like many quotes and excerpts from Dune, which I contend is one of the greatest science fiction novels ever written, it pleases and intrigues me. It also reminds me—when I am smitten with the unwarranted attention the criminally indiscriminate among you have bestowed upon the thin leavings I whimsically scatter here at unreliable intervals like some verbose will-o-the-wisp—that I am anything but great, or even worthy of attention. I use it sardonically, you see.

I am not without self awareness.

But now I have decided, for the nonce, to abandon you, as I have made clear before. Bummer that, but it cannot be helped. “To everything there is a season,” or some such bullshit. So it strikes me as only fair to post a list of the ten most popular posts I have ever released upon an unsuspecting and undeserving world,¹ if only so some people can focus their anger at global injustice and bank overdraft fees on a similarly appalling yet perhaps more accessible target. It is better than reading Slate or Gawker or Jezebel or Guardian pieces, anyway. And they don’t need the page views, I do. I still owe Blogger.com a helluva lot of money for excess pixel consumption, you see.

So enjoy, and please remember to deposit your candy wrappers, empty soda bottles, and previously unexamined prejudices in the handy trash receptacles at the end of the show.

THE CANONICAL CANON, All-Time Canonical Edition:

1) Curriculum Vitae (March 2013) — The canonical career path for young tadpoles to hoary old bullfrogs in my business, corporate finance and M&A. This is what your life will look like if you choose to follow me, children. Warts and all.

2) The Mouth of Sauron (February 2010) — A hit piece, richly deserved, on the fabled former mouthpiece of Goldman Sachs, Lucas van Praag, who is no doubt happily torturing small animals with forks on a leafy Victorian estate in his dotage.

3) The Rules (November 2012) — Read them. Live by them. Pay particular attention to Rule #5.

4) Jane, You Ignorant Slut (May 2011) — The opening salvo in a series of posts about rampant ignorance in the financial press and blogosphere about the nature and mechanics of initial public offerings. This rabbit hole is deep, Alice. Beware.

5) The Invention of Leisure (November 2013) — Junior investment bankers work hard. No matter what people may say or think or do about it, this will not change, and there are very good reasons for that. Not bad reasons, good reasons. See Rule #5.

6) Overheard at 85 Broad Street (June 2008) — An old post in which I eviscerate those gutless weasels at Goldman Sachs who fucked over junior bankers during the Financial Crisis in a particularly cowardly and reprehensible way. I can neither confirm nor deny rumors that Goldman moved its global headquarters to 200 West Street solely to escape the historical opprobrium of this post.

7) Go Ask Alice (September 2013) — The bookend to the series on IPOs, begun with 4) above. Read these two, and the intervening posts, and you will know more about IPOs than most investment bankers and all financial pundits.

8) A Fine Disregard for the Rules (January 2014) — More reasons why junior investment bankers work like dogs and always will, no matter how many foosball tables and papaya soy lattes Google and Facebook try to tempt them with.

9) To Catch a Thief (February 2009) — Do investment bank executives strike you as, well, a little odd? I suspect you are right.

10) Where Did He Learn to Negotiate Like That? (August 2014) — Investment bankers, by training and inclination, tend to be much better negotiators than many of their clients. Occasionally this works to the client’s disadvantage.

* * *

Since these posts are ranked here, as is my custom, simply by aggregate historical page views as collected by Google Analytics, some of you may notice a recency bias, as the number of readers coming to these pages has accreted over time like barnacles on the hull of a poorly maintained ocean freighter. You will also notice a narrower range of topics and treatments than your local bartender may have informed you I offer, which is related to said recency. Those masochists among you who would like to explore both deeper in time and more broadly across my variegated oeuvre I would encourage to start in the archives and use my idiosyncratic keywords and Blogger’s search function liberally. There is nothing for it but to dive in, headfirst, and try to stay afloat on my sea of words, just as a tyro investment banker plunges into her apprenticeship of fire.

The metaphors are deep, O Dearly Beloved, and mixed. Welcome to my world.

Related reading:
Table of Contents — the archives
Topics Addressed in These Pages — idiosyncratic keywords

¹ I exclude, as is my custom, generic results like this blog’s home page, recommended reading, outdated personal information, introductory blather, and my curated archives. I suspect you can have no objection.

© 2014 The Epicurean Dealmaker. All rights reserved.

Oop. Time, She’s Up

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 20 Sep 2014 22:52:00 +0000

“I am old, Gandalf. I don’t look it, but I am beginning to feel it in my heart of hearts. Well-preserved indeed! Why, I feel all thin, sort of stretched, if you know what I mean: like butter that has been scraped over too much bread. That can’t be right. I need a change, or something.”

― J.R.R. Tolkien, The Lord of the Rings

When I launched this blog seven and three-quarters years ago, O Dearly Beloved, my first post incorporated the following mission statement:

I have started this blog to comment on what I consider to be a fascinating part of the global economy: the global market for M&A and its various inhabitants, participants, and miscreants. Hopefully I will be able to relate some interesting anecdotes, a few enlightening opinions, and a couple of amusing stories that will shed a little more light (or a little more laughter) on what remains for many a murky area best left to investment bankers, corporate lawyers, and other such terrifying bogeymen.

Five hundred and sixty-six published posts later, more or less, plus a lumber room of unpublished fragments, ruminations, and provocations, I think I am ready to declare victory and move on. This is not necessarily because even I believe that I have achieved victory, mind you. That is for you Lovely People and the sub-sub-librarians of internet history to judge. But one of the advantages of running a blogsite of which you are the sole, unimpeachable authority, author, and editor rolled into one is the ability to make such unilateral declarations without fear of pesky contradiction from the peanut gallery. (I have not made it a policy here to prevent comments for nothing, children. If you object I can direct you to a convenient pile of nearby sand which needs pounding.)

Of course those of you who have made an intermittent study, intentional or not, of my ramblings on this site will be aware that my output has both exceeded and failed to satisfy my stated mission of explaining the market for corporate mergers & acquisitions. The lion’s share of this mission creep (or evasion, if you will), I must put down to my lack of discipline: I have used this platform to hold forth on all sorts of topics and sundry, many of which fall far afield from the cloistered halls of buying, selling, and financing companies, which is my primary trade. I have addressed mildly cognate fields like private equity, Corporate America, and the history, structure, and pay of the investment banking industry; more tenuously related areas including hedge funds, capital markets, and financial regulation; and wildly off-topic digressions such as higher education, philosophy, and identity in the age of Facebook and the NSA. I have indulged my fancy for humor without regard for its funniness to anyone else, and I have waded into culture and art criticism without shame or regard for my lack of training or expertise therein. I have posted pictures and poems that appealed to me, for no other reason than I could.

In other words, I have written about what interests me, in addition to that much narrower and shallower range of topics to which I legitimately claim any expertise. The curated list of my more prominent posts runs to many pixels and reveals the breadth of my work. I remain unapologetic about this. This site is a personal blog, not a public service. Those of you who disagree with my choices are welcome to join the protestors from the first paragraph at the nearby mound of silica, etc., etc.

* * *

I was lucky to start blogging when I did. Financial markets had reached a peak of silliness which offered rich fodder to a financially literate cynic such as myself. Soon, the global financial crisis elbowed aside these more pedestrian concerns to offer a rich and exciting topic for me to both demonstrate my naturally firmer grasp on markets and the financial industry than the legions of panicky and underinformed journalists and pundits who were scrambling to understand and report it and also learn more about the crisis’s players, issues, and concerns than I had theretofore known myself. While I claim no particular merit for having done so, I take pride in contributing some measure of rational, grounded knowledge and facts to a society-wide conversation about the Panic which was badly in need of them. I even tried to contribute more serious thinking to the reform of financial regulation in this context, but sadly that seed fell on stony ground.

Subsequently, I think I have contributed some things of use to the broader understanding of investment banking and financial markets, including reality-based commentary on initial public offerings, illumination of the ways and byways of careers in my industry, and a little insight into the plight and prospect of women in high powered careers like mine. Hopefully these small contributions have added something of value to the public understanding and hence social weal. If so, I am glad. If not, well, you all got what you paid for.

But now I have reached a pass where I find it increasingly difficult to maintain any sort of regular posting on these pages. Most of what I have to say about things I know I have already said, often more than once. I have come to realize I will never convince those who believe in their bones that investment banking and financial markets are useless, evil, or a social liability rather than a boon. People who use the word “bankster” unreflectively and unironically are not now and never will be interested in what I have to say. People who have a more nuanced understanding, or who continue to form their opinions on the matter, have many more sources today than they used to to call upon, and a much broader and deeper understanding of these issues in the press. I hope I have contributed in some small way to this education. Unless Blogger.com sinks beneath the waves, people should always be able to find my blatherings on these topics gathering dust at this location for handy reference anyway.

I expect I will continue to maintain this site in some small way, perhaps adding a post here and there to the topic listing at the Table of Contents and maybe even doing a final and/or comprehensive post of Greatest Hits. But I do not anticipate blogging here regularly any more. I have reached the end of the interests and expanded mission which drove me to launch myself into cyberspace in the first place. Now I am most interested in topics where I am a student and a learner, not a master, and I want to spend the not inconsiderable time I have devoted in the past to explaining financial arcana and beating back the ignorance of the unfair and unjust here to reading and thinking about others’ expertise and ideas instead.

* * *

If I find I have something interesting to say, never fear, O Faithful and Long-Disappointed Readers, I will probably say it here. Those of you who know me via this opinion emporium probably have little doubt of that. I am the sort of person in fact whom it is almost impossible to shut up. It just is unlikely to be a regular affair, and this site is likely to sink into desuetude and decay as the years lengthen. Whether I decide to pop up in some other form, at some other place, I have yet to decide.

If I do, I’ll be sure to drop you a postcard. Cheerio.

Related reading:
Fragments (February 26, 2010)
Table of Contents (February 16, 2013 and passim)

© 2014 The Epicurean Dealmaker. All rights reserved.

Some Work of Noble Note May Yet Be Done

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 14 Sep 2014 16:56:00 +0000

We are not now that strength which in old days
Moved earth and heaven, that which we are, we are,
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.

— Alfred Lord Tennyson, “Ulysses”

Ever since the release of Dr. No in 1962, the James Bond 007 films have acted as a touchstone and running commentary on popular culture and society. For over half a century, a parade of different Bonds, Bond Girls, and increasingly over the top villains have offered escapist fantasies of varying implausibility and ridiculousness which have served, inter alia, as travel brochures, fashion statements, and advertisements for the benefits, drawbacks, and terrors of technological progress. They have done this, for the most part, not because it was their makers’ purpose (or even within their power) to critique society, but rather because they were intended to be hip, with it, and relevant, even at the inevitable expense of any seriousness or credibility. (Roger Moore, anyone?) With various degrees of success, these pop confections have held a mirror up to society. It is no wonder not everybody likes what they see.

These thoughts were inspired by film critic A.O. Scott’s interesting essay on the death of adulthood in American culture, which seems to be making the rounds of the culturesphere. He says many things, but his major point seems to be that popular culture, moviemaking preeminent within it, has elevated a strain of anti-adulthood and fixation on youth long dominant in American culture to the forefront of everything we see. I am not qualified to judge the correctness of his claim, but it certainly does seem to me the flight from responsibility and adulthood and the joys and tribulations of perpetual adolescence have become a leading subtext or topic for a very large number of popular entertainments nowadays. In particular, this cultural conversation seems to be focused on men and boys and their refusal to grow up.

Interestingly, upon reading Scott’s essay, my thoughts turned immediately to the most recent film in the Bond series, Skyfall. It occurred to me this movie can be read as providing a very interesting commentary on the issues of growing up, responsibility, and adulthood for a man nowadays, even if—or perhaps because—it is wrapped up in a popular escapist spy thriller. I claim no special cultural profundity for the film, nor no searing insight for the filmmakers or screenwriters, but I think the mirror which this particular thriller holds up to our current zeitgeist is pretty revealing. Even if the cultural critique I read within it was unconscious, or only semi-intentional, that does not vitiate its insight or force. Perhaps it enhances it. You Delightful Readers can judge for yourselves. If Stanley Cavell can find deep commentary on Hamlet embedded in Alfred Hitchcock’s North by Northwest, I can certainly tease a bildungsroman out of a Bond film. It’s my blog, anyway.

* * *

I will not tax your patience by relating the plot or other details of the film which you can discover yourself if you like. Nor will I spare you any spoilers. If you have not seen it already, there is no plot element I can reveal that will diminish your appreciation of the movie as cultural critique. In my experience, anyway, it is a measure of the quality of a story that you are willing to reread or rewatch it even when you know how it turns out. Skyfall is that good a movie.

The key plot points I would draw your attention to are as follows:

At the beginning of the film, Bond is accidentally shot by his competent, no-nonsense assistant while attempting to recover a stolen data file from the top of a train barreling toward a tunnel of no return (cue Alfred Hitchcock and Sigmund Freud). Bond’s assistant, who happens to be black and female, shoots him on the explicit orders of their boss at British intelligence, “M,” who, while white and old, also happens to be female (Judi Dench). Bond, by the way, is an orphan who has a simultaneously fraught and close relationship with M which a casual observer could mistake for a mother–son dynamic.
After plunging to his apparent death in deep water (cue Carl Jung, opening credits, and Adele’s theme song), we later discover Bond is alive after all, although he appears to be hiding from M and MI-6 in an exotic backwater and spending his time in self-destructive drinking, meaningless sex, and taunting dangerous arachnids for thrills and money.
Bond comes back home to ~~mother~~ M when he hears she and MI-6 are under attack by a mysterious hacker who can penetrate British intelligence’s defenses at will. M displays no regret, casually informs Bond she has sold his home and all his belongings, and puts him into a crash course to get fit for active duty again, at which he struggles painfully. Nice homecoming.
Bond tracks the mysterious hacker through various exotic locales and the beds of one or two expendable women to an abandoned island off the China coast, where he discovers a platinum blond Javier Bardem who minces and lisps and puts the moves on our trussed up spy. Bardem, it seems, is Bond’s evil twin, who is pissed at M for betraying him to the Chinese. He has channeled his anger into a worldwide empire of computer intelligence and manipulation, which he sells to the highest bidder. Strangely, though, this evil computer genius uses data screens that look like video games.
After more plot machinations and an unsuccessful attempt on M’s life by Bardem (for an evil computer genius, he’s pretty lame with a gun), Bond flees with M to his ancient family home in Scotland, Skyfall, where he acquired what an MI-6 psychologist called his “pathological rejection of authority due to unresolved childhood trauma.” Bond himself tells M they’re going “into the past.” For transportation, they use Sean Connery–Bond’s Aston Martin DB5 from 1964’s Goldfinger. Into the past, indeed.
An epic battle ensues at Skyfall, in which Bond, M, and Bond’s old gamekeeper and surrogate father battle Bardem and his small army, resulting in the destruction of Skyfall (which Bond hates), the Aston Martin DB5 (which only seems to mildly irritate Bond), and Bardem’s army. Bardem tracks a wounded M to a chapel where, while trying to persuade her to shoot both herself and him in the head to end their misery, Bond literally stabs Bardem in the back with a large hunting knife. So much for homosexual tension with your evil twin.
Finally, after blessing Bond with her approval, M dies.

* * *

Now of course everyone who watches Skyfall knows all about James Bond. (All Bond movies assume it.) He is a charming, ruthless killer, a master manipulator with no empathy who treats friendly and hostile women alike like Kleenex and enemies like target practice. He is unmarried and childless, a man with no duties or responsibilities other than his job, which he often does grudgingly and against orders. Come what may, he always wins, usually punctuating his triumph with a cynical joke. As a cultural symbol of the last half century, James Bond is Peter Pan with a gun. For a British character he is as American as they come.

And yet in Skyfall he is betrayed and (symbolically) killed by women (including his mother), he falls into adolescent irresponsibility and self destruction, he is blocked and belittled by the genius avatars of today’s high technology (one of whom is gay or bisexual and the other is so young he still has spots), and he struggles not very successfully against physical and intellectual decrepitude. What more comprehensive list of challenges facing modern American man can one compile? What greater list of fears and blocks to maturity torture the brains of today’s man: emasculation, obsolescence, irrelevance, sexual confusion, self-indulgence, failure, age?

But Skyfall’s James Bond does not remain on the beach in India to sulk, boozing for breakfast and daring scorpions to sting him. He does not smoke pot and play Parcheesi with his stoner 30-something friends while the world burns or skip dates with beautiful women far out of his class to rearrange his vintage comic book collection. He is no Marvel superhero or genetically enhanced super soldier who can pretend to be invincible. This James Bond is the most vincible hero we have seen. And yet he picks himself up painfully, dusts himself off, and throws himself back into a game he is not sure—we are not sure—he can win, because it is his duty.¹ This is the opposite of the flight from adulthood. This is its embrace: the embrace of duty and responsibility. If there is a bubblegum escapist fantasy thriller which offers a better critique of the flight from adulthood—yet does not shy away from depicting how difficult and costly adulthood is—than this, I do not know what it is.

* * *

At one point, as Bardem’s villain bears down on M’s public hearing to kill her and Bond sprints through the streets of Whitehall to stop him, Judi Dench–M recites the conclusion from Alfred Lord Tennyson’s poem “Ulysses” at the top of this post. The effect is inspirational, as we fully understand by now the effort and will it requires for Bond to push his aged, broken-down body through the streets to rescue both the head of his service and the only woman he has considered his mother for his entire adult life.

And yet Bond is not Tennyson’s Ulysses, a selfish, vain old man who wants to abandon his aged wife—who waited patiently for him for twenty years of wandering—his dutiful son, and his own people, to fling himself onto the wine dark sea once more in search of glory and adventure. No, Bond is a soldier, a dutiful son who dons his buckler and sword to wade again and again into the blood and mud of the battlefield, risking life and limb for the country which is his only family and his only allegiance. At the end of the movie, Mallory–M welcomes him into his new office—the original Bernard Lee–M’s office, down to the paneling, soundproofed door, and paintings on the wall; a fine, full circle the filmmakers have crafted for us²—and tells him as he tosses a new mission brief onto the desk, “So, 007, lots to be done. Are you ready to get back to work?”

Bond replies with a smile, “With pleasure, M. With pleasure.”

That is adulthood, children. That is what it means to be a man.

Related reading:
A.O. Scott, The Death of Adulthood in American Culture (The New York Times, September 11, 2014)

¹ I am not overlooking the element of revenge in Bond’s motivation; it is undoubtedly there. But this is just to say that Bond’s character’s motivations are multifarious and complex, as they are in real life. This makes Skyfall a better film, if a more complicated and ambiguous one in many respects.
² Note how, having reset the location of M’s office back to its setting from the very first film of the series, the filmmakers have also given enough backstory and proof of Mallory’s personal courage and toughness to justify his position in M’s chair. No longer just a fat, slightly ridiculous old man behind a desk, M’s role as leader and father to James Bond has been justified to us and to Bond. This little bit of the patriarchy, at least, makes sense again.

© 2014 The Epicurean Dealmaker. All rights reserved.

Amakudari Revisited

noreply@blogger.com (The Epicurean Dealmaker) — Wed, 03 Sep 2014 17:43:00 +0000

Thomas Nast, Mr. Moneybags

“If you were sensible of your own good, you would not wish to quit the sphere in which you have been brought up.”
“In marrying your nephew, I should not consider myself as quitting that sphere. He is a gentleman; I am a gentleman’s daughter; so far we are equal.”
“True. You are a gentleman’s daughter. But who was your mother? Who are your uncles and aunts? Do not imagine me ignorant of their condition.”
“Whatever my connections may be,” said Elizabeth, “if your nephew does not object to them, they can be nothing to you.”

— Jane Austen, Pride and Prejudice

Newly listed advisory boutique Moelis & Company set the cat among the pigeons yesterday by announcing it has hired former House Majority Leader Eric Cantor to be a director of the company and a Vice Chairman in their advisory group. This news seems to have pleased approximately everybody, from Moelis & Co., which is delighted with their prominent and newsworthy new hire; Mr. Cantor himself, who can anticipate being approximately $3.4 million richer over the next 18 months or so; and up to and including critics of the Washington-to-Wall Street revolving door, who are now in possession of rich fodder for tut-tutting opinion pieces bemoaning the sorry state into which our crony capitalist democracy has sunk. In Washington, D.C. and on Wall Street as well, it is an ill wind that blows nobody any good.

While the generous cash and restricted stock which Mr. Cantor is receiving from his new employer seems to have been viewed by most as sufficient and self-evident explanation of why he chose to accept Moelis’s offer, there does seem to be some confusion among certain commentators as to why Moelis wanted him. Dennis Kelleher, former Senate staffer and head of non-profit public interest lobbying group Better Markets—about which nobody was talking last week and about which everybody (or at least a larger number of somebodies) is talking this week, thanks to said announcement—claims loudly that Moelis hired Cantor because 1) they wanted the publicity, 2) they want his political insight and connections to lobby for legislation and regulation favorable to their business, and 3) they want to matter more in Washington. While Matt Levine effectively deflates the more grandiose and overreaching of Mr. Kelleher’s claims—and particularly punctures the notion that a focused advisory boutique like Moelis & Co., which faces few of the proprietary trading or balance sheet capital issues its larger integrated universal bank competitors do, has common cause with said competitors in shaping the larger regulatory agenda—I cannot disagree with the broad outline of Mr. Kelleher’s remarks.

The important nuance which I would add, however, is that Moelis’s hire of Mr. Cantor must be examined in light of their mission as a client-focused advisory firm. Mr. Kelleher’s claims gain more weight if one properly understands that, notwithstanding the official job titles which Moelis & Co. have granted the deposed ex-Congressman, his real role at the company should be understood as Pet Famous Politician.¹

As such, Mr. Cantor has several interrelated roles and duties:

Publicity magnet – To raise, by his very presence, the profile and awareness of Moelis & Company in Washington, D.C., the news media, and the general population at large. Ken Moelis, while broadly known on Wall Street and among the business community, does not carry the star wattage to pull this off by himself. This is known as general brand advertising.
Fame whore magnet – Notwithstanding all their wealth, power, and influence in the economy—and their often low opinion of and fraught relationship with government—even the most illustrious businessperson tends to get a flutter of excitement when they meet a well-known politician. This can probably be laid to the fact that even the meanest politician tends to have fame and celebrity status well in excess of the average business leader, and almost everybody is curious to meet a celebrity. It also probably has to do with the fact that politicians tend to have power, and business people tend to be the kind of people who are attracted to power.
Door opener – As Messrs. Kelleher and Levine both agree, Mr. Cantor is neither trained in nor necessarily exhibits any of the transaction processing skills of an advisory investment banker. Nevertheless, Mr. Cantor is likely to have some contacts in his Rolodex whom his new colleagues would love to get in front of to pitch their wares, and I am sure they will hand him a prioritized call list as soon as he walks in the door. Even if Mr. Cantor does not personally know all of his employer’s prospective clients, senior calling officers will be eager to use him as bait (see Fame whore magnet, supra and Subject matter expert, infra) to get that key meeting with a high priority target CEO or Board of Directors which they’ve been trying to break into for ages. The kind of large, high profile clients which a Moelis & Co. wants to work with tend to have overwhelming numbers of investment bankers constantly importuning them for business and usually limit their work to a small handful of trusted relationships. Hence they tend to keep unknown bankers at a firm arms length. The flimsiest excuse to get a client to open the door and take a meeting—“Hey, come meet the former House Majority Leader of Congress!”—is welcome. Besides, correctly or not, most senior bankers believe once they get in front of a client they have the skill to win the assignment themselves; all it takes is access. Mr. Cantor will only have to smile, relate a few political war stories, and then shut up.
Subject matter expert – Our ex-Congressman does have one obvious skill set which is highly valuable in corporate advisory work and which is cultivated assiduously by senior bankers eager to build a name and a business for themselves: he is very well connected and extremely knowledgable in an important segment of the economy and the dealmaking environment. The fact that his subject matter is relevant in multiple dimensions to almost every business which Moelis & Co. would like to serve is just icing on the cake. Chief Executives and Board directors will be exceedingly interested in the insights Mr. Cantor can share about who knows what, who hates whom, and how things get done inside the Beltway, because in almost every instance that will have a direct effect on their daily business and/or the particular capital raising, M&A, or corporate finance transaction at hand. This is an area where Mr. Cantor will be able to add real content to the discussion and share valuable information and intelligence all on his own, and it won’t involve him smiling and shaking hands like a bobble doll.
Deal originator – Of course, under the right circumstances, there is nothing to prevent Mr. Cantor from using the assets and attractants listed above to source his very own transactions, instead of just contributing to those of his colleagues. This would certainly entitle him, in my book, to a shot at much larger incentive compensation than Moelis & Co. have guaranteed him for joining the firm. There is also circumstantial evidence that Mr. Cantor may indeed have key senior investment banker skills of a high order. After all, a very large component of his job as Congressman and House Majority Leader involved selling, creative dealmaking, and high stakes, high pressure negotiation. These are the critical skills a senior investment banker must bring to bear to win assignments and close transactions, not filling in spreadsheets or wordsmithing press releases. That’s what the little people do. If Mr. Cantor is looking for inspiration along these lines, he could do worse than consult the case of Rahm Emanuel, who turned a senior political aide position in the Clinton administration into a two-and-a-half year stint at Wasserstein Perella that earned him over $18 million.

Perhaps Mr. Cantor is not quite so unworthy after all.

* * *

Of course, in your wonted role as Clever and Discriminating Readers, you delightful people will already have noted that nowhere in my speculative litany of tasks for which Moelis & Company may have hired our peripatetic politician is the duty of lobbyist. It is possible, of course, that his employer does anticipate fielding Mr. Cantor back inside the Beltway when his current restrictions expire. But, if so, I suspect any such lobbying will be indirect and done on behalf of clients rather than for Moelis & Co. itself. In fact, I venture to guess Mr. Cantor will most likely offer access and intelligence on whom to contact within government to his employers and clients, rather than leading any direct or indirect lobbying charge himself. After all, if he pulls off his other roles appropriately, he will be both too busy and making too much money for the firm to spend much time hanging out with politicians and regulators.

I suppose this is the best explanation of both Mr. Cantor’s appeal to an investment bank like Moelis and the amount of money a former Congressman like him can make via amakudari. Like it or not, government is important to business, and the people who know how it works, how to make it work, and whom to work to make it work carry extremely valuable intelligence, even if they do not meddle directly in the process. In fact, I suspect Moelis & Co. spends less on senior lobbyists than they hope and intend to pay Mr. Cantor.

After all, investment banks are in the business of making money. Not changing regulations.

Related reading:
Moelis & Company, Form 8-K dated September 2, 2014
Annie Lowrey, What Eric Cantor Is Really Going to Do on Wall Street (New York, September 2, 2014)
Matt Levine, What Can a House Majority Leader Do for a Bank? (BloombergView, September 2, 2014)
Timothy P. Carney, Cantor’s not lobbying, but his big payday should upset conservatives (Washington Examiner, September 2, 2014)
Amakudari (January 20, 2007)

¹ It is important to note I claim no special insight into Moelis & Company’s actual rationale for hiring Mr. Cantor or its future plans for him. These remarks constitute rank speculation, based solely on public information and my over 20 years of experience in the Wall Street septic tank, not privileged insider information. That being said, I have seen similar scenarios before, and they almost all fit the pattern which I lay out for you charming people above. My rank speculation, in this instance, is probably a pretty good guess.

© 2014 The Epicurean Dealmaker. All rights reserved.

Labor Day

noreply@blogger.com (The Epicurean Dealmaker) — Mon, 01 Sep 2014 18:04:00 +0000

Diego Rivera, Melancholy Promenade, 1904

Thomasina: “Oh, Septimus! — can you bear it? All the lost plays of the Athenians! Two hundred at least by Aeschylus, Sophocles, Euripides — thousands of poems — Aristotle’s own library! … How can we sleep for grief?”
Septimus: “By counting our stock. Seven plays from Aeschylus, seven from Sophocles, nineteen from Euripides, my lady! You should no more grieve for the rest than for a buckle lost from your first shoe, or for your lesson book which will be lost when you are old. We shed as we pick up, like travellers who must carry everything in their arms, and what we let fall will be picked up by those behind. The procession is very long and life is very short. We die on the march. But there is nothing outside the march so nothing can be lost to it. The missing plays of Sophocles will turn up piece by piece, or be written again in another language. Ancient cures for diseases will reveal themselves once more. Mathematical discoveries glimpsed and lost to view will have their time again. You do not suppose, my lady, that if all of Archimedes had been hiding in the great library of Alexandria, we would be at a loss for a corkscrew?”

— Tom Stoppard, Arcadia

Do you take stock, regularly, of what you are carrying in your arms, Gentle Reader? Do you take care to pick up and discard the right things, things which make you happy and proud to carry? Do you seek out and cultivate those things you will be pleased to press into the arms of companions who go on without you? Things they will be eager to carry themselves? Love, knowledge, kindness, and wisdom are big things, things which fill up your arms and your soul, but paradoxically weigh next to nothing: they are easy to carry. They make excellent gifts to bequeath at the end of your long journey.

Keep your eyes on the road before you. Stay alert for good things to add to your burden. Those are the legacy you will contribute to the march. That is how we will remember you.

It’s time to go back to work.

© 2014 The Epicurean Dealmaker. All rights reserved.

All Hail and Farewell, the Trophy Kids

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 23 Aug 2014 20:00:00 +0000

Adolphe-William Bouguereau, The Birth of Venus, 1879

Mildred: “That Ted Forrester’s nice-looking, isn’t he? Veda likes him.”
Monte: “Who wouldn’t? He has a million dollars.”

— Mildred Pierce (1945)

Wall Street has a problem.

Kevin Roose, who wrote the definitive bildungsroman/sob story of early-2010s twenty-somethings on Wall Street, nails it. Finance is no longer the first choice of ambitious, high-achieving college graduates. Technology is:

Hyperdriven, multitalented young people aren’t picking tech over finance because it pays more. They’re picking it because the lifestyle is better, because it’s just as competitive to get into (if not more so), and because being on Facebook’s mobile ad team allows them to feel better about themselves than making DCF models for Fortune 500 companies all day. In their eyes, going into tech is a way to remain among the cultural elite without selling your soul.

It’s not that Goldman Sachs, Morgan Stanley, and every other well-known firm aren’t attracting enough candidates, they’re just not attracting the “best” ones:

These firms are having no problems drawing applicants out of college, but what I’ve heard from senior Wall Street hiring managers is that they’re not the right kind of applicants. They’re second-stringers, as far as the banks are concerned. The students these firms want to attract — badly — are increasingly going to Google or Facebook instead of Goldman and J.P. Morgan. (Or, almost worse, going to Goldman and J.P. Morgan, working for a year or two, and then quitting to go to Google or Facebook.) And that kills the banks’ sense of supremacy.

I suppose it is a measure of our diminished times that Mr. Roose chooses to dub these careerist paragons of conventional wisdom “Renaissance Kids,” but I get that he needs to flatter his demographic that their uninspired and riskless choices denote some measure of intellectual breadth or reflected historical glamour. After all, he has trend pieces to write and books to sell. Personally, I cling to the outmoded notion that “renaissance man” (or woman) should mean something deeper than a Groton- and Harvard-educated 3.70 GPA history major/lacrosse player who read the Bhagavad Gita once in order to satisfy a distribution requirement. But I am stubborn that way.¹

Instead, I prefer to label these special snowflakes Trophy Kids, since their entire young lives have been spent in pursuit of trophies and awards of all kinds, scrapping and scrambling to get into the best schools and the best clubs and the best jobs from the moment their hypercompetitive parents decided they should. Of course, “best” in this context means what everybody else thinks is best, so the trophies we are talking about are clear, unambiguous, and well recognized by everyone: top grades in school, passionate commitment to approved extracurriculars, conspicuous community service to high profile, photogenically needy causes, and the right employer out of college.

“Trophy Kids” is also apt because these socioeconomic poster children make themselves highly desirable as acquisitions by those institutions which aspire to have the best themselves, just like aging billionaires like to accumulate trophy wives and girlfriends. It is not too far to stretch a metaphor to observe that Trophy Kids’ relationships to high-prestige employers are fundamentally the same as trophy wives’ to their husbands: an often temporary marriage of convenience in which the former trades her looks, sex appeal, and other attractive qualities for the wealth, prestige, and social access her unpleasant toad of a spouse delivers her. A cynic might also point out the parallels between sweating 80 to 100 hours a week under fluorescent lights day in and day out for two years as a Financial Analyst to the occasional unpleasant duties of the marriage bed which a hot young sex bomb must endure with her aging Lothario. Everything has a price, children.

* * *

And this explains why investment banks like Goldman Sachs want to recruit the tippy top of the best and brightest to their sausage factories, O Dearly Beloved: they want trophy employees. They want them not because, as Kevin Roose correctly observes, they need such hyper-accomplished hothouse flowers to program their 50-page spreadsheets and 100-page PowerPoint presentations. I have banged on at length about this before: they don’t. Trophy Kids often make lousy investment bankers, at least over the long term, because my business is a client service business. In contrast, Trophy Kids have been raised from birth to want and expect to be the client.

No, investment banks seek out recruits like these because it makes current employees who interview them feel powerful, important, and validated when hundreds of eager young beavers with looks, accomplishments, and grades better than theirs grovel and squirm to get into their good graces. They want them because Human Resources Department employees—virtually none of whom even got accepted to the top schools they limit their recruiting to—want to create glossy brochures, college night PowerPoints, and website profiles which look like Benetton commercials on steroids: multicultural, multigendered, multicolored paeans to underprivileged Rhodes Scholars who rose from Detroit to Stanford on full merit scholarships and singlehandedly saved the economy of Botswana in their spare time sophomore year. They want them, pace Mr. Roose, not because any client ever bothers to read the junior analyst’s bio on page 97 of the pitch book (they don’t) or because Lloyd Blankfein likes to shoot the shit with 23-year-old Yale graduates about Kierkegaard’s conception of agape love in airline waiting lounges (I venture to say he doesn’t), but because both these audiences like to brag to their wives and Business Rountable buddies they have Ivy League valedictorians lining up dozens deep to carry their golf bags. Trophy Kid employees validate the social status of investment bank(er)s, too.

* * *

And Mr. Roose rightly points out this mutual attraction is fading. What he fails to note, however, is that Wall Street’s perch as the preeminent post-graduation employer of choice for high-achieving college graduates is a relatively recent phenomenon. Finance in the 1980s was a relatively sleepy backwater, as far as ambitious college graduates were concerned. It didn’t employ very many recent graduates, and its reputation was somewhat louche and recherché for conventionally ambitious folk: Liars’ Poker and Barbarians at the Gate, not In Search of Excellence. It accumulated prestige as the industry grew in the 1990s, but it took the tidal wave of money that drove the global financialization of economies in the early- and mid-2000s to really push it to the top of the heap of college seniors’ preferred employers. At that point, the leading banks were rich, familiar to everyone around the world, and hiring thousands of eager young tyros. What was a graduating Yalie not to like?

Individual firms evolved very different reputations over that period, too. I snorted out loud when I read Mr. Roose describe Goldman Sachs styling itself “the thinking man’s investment bank.” It wasn’t too many years ago when Goldman bankers were universally considered hardworking, relatively unimaginative schlubs, B players who sacrificed their health, their marriages, their relationships with their kids, and the chance to make more money almost anywhere on the altar of Mother Goldman in exchange for the brass ring of partnership after twenty years of toil. They weren’t the most brilliant bankers on Wall Street; they were just the most relentless and the best coordinated. Goldman’s effectiveness did not arise from its bankers’ individual intelligence. It came from their discipline and uncanny ability to act in sync like a colony organism. Goldman bankers didn’t need to be smart. They just needed not to be stupid, unlike most of their competitors. And they did a pretty good job.

Recently of course—probably contemporaneously with its entire Executive Committee each earning over $60 million in one year and their former CEO parachuting into the padded chair of the Secretary of the Treasury—Goldman Sachs became the font of all munificence and socioeconomic status for a large class of strivers, including the products of elite higher education. But now the Financial Crisis and the ongoing secular shrinkage of the industry thereafter has taken the bloom off that rose, and the wealthier and more prestigious environs of Silicon Valley are what make the supremely ambitious college senior’s heart flutter. Sic transit gloria.

* * *

And this is okay, as I have written here before. Wall Street is shrinking, and we neither need nor deserve right of first refusal on all or even a majority of the talented, hardworking, untrained young cannon fodder issuing forth from the gates of academe each year. Let Facebook and Google have the trend-chasing social climbers who will do anything to get into whatever profession U.S. News & World Report anoints the best employer this year, so they can preen to their family and friends at Thanksgiving. Investment banks face a bigger threat from the private equity and hedge fund industries, who have gotten big and prestigious enough themselves that they now routinely siphon off a huge number of the most talented hardcore finance junkies who used to staff our engine rooms. Nevertheless, I suspect we will weather this challenge, too, along the way to reinventing ourselves as Investment Banking 6.0.

After all, Wall Street has always found a way to change and adapt. I am sure we will survive the absence of double Catalan-Poetry-and-Neuroscience majors from Princeton just fine, too.

Related reading:
Kevin Roose, Sorry, Wall Street. Paying Young Bankers More Won’t Make You Cool Again. (New York, August 22, 2014)
The Fish Stinks from the Head (July 30, 2009)
A Hard Rain’s Gonna Fall (September 30, 2011)
If the Phone Don’t Ring, You’ll Know It’s Me (October 1, 2011)
You Go First (July 7, 2014)

¹ This is not to diminish such achievements, by the way, which demand real commitment, talent, and drive to accomplish, but let’s not kid ourselves Muffy or Bif (or Peeta, Carlos, or Fang) are the second coming of Leonardo da Vinci. It is also worth mentioning that a 3.70 GPA is not that hard to achieve nowadays at Harvard College, where the “median grade… is an A–, and the most frequently awarded mark is an A.” Investment bank recruiters take note.

© 2014 The Epicurean Dealmaker. All rights reserved.

A Cure Worse Than the Disease

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 10 Aug 2014 17:11:00 +0000

Messenger: “I see, lady, the gentleman is not in your books.”
Beatrice: “No; an he were, I would burn my study. But, I pray you, who is his companion? Is there no young squarer now that will make a voyage with him to the devil?”
Messenger: “He is most in the company of the right noble Claudio.”
Beatrice: “O Lord, he will hang upon him like a disease: he is sooner caught than the pestilence, and the taker runs presently mad. God help the noble Claudio! if he have caught the Benedick, it will cost him a thousand pound ere a’ be cured.”

— William Shakespeare, Much Ado About Nothing

I suppose it does little harm to admit, O Dearly Beloved and Long-Suffering Readers, that this site is shot through and through with what my colleagues across the gaping divide in Sales & Trading would call “talking your book.” Notwithstanding the slings and arrows sent this way by those who can see no redeeming social or economic benefit to my profession, I am proud of what I do, and I firmly believe I offer real value to my clients in return for the shiny simoleons which they so graciously bestow on me, however so (and too) infrequently. This should not really be that surprising. I think there must be few human beings who do not find some sustaining or redeeming value in their daily occupation, even if only as a sop to their self esteem or a dodge against despair, and despite all your protestations I continue to aver that investment bankers are human, too.If you prick us, do we not bleed?

That being said, I think I have been pretty honest in these pages (and in the conduct of my daily duties, too) that M&A advisory services are not for everyone. There are many reasons a client might consider in deciding whether to employ someone like me, and not all of them make sense or can be justified by any honest calculus. While there are plenty of dissembling shysters roaming my industry intent on imposing their services and extravagant fees on anyone they can convince to write a check, I have always been of the opinion that you make a client happy in the long run by only recommending what is truly beneficial for them, rather than yourself. And often, hiring an M&A advisor is not the best course of action. At least not yet.

* * *

So I am pleased to take this opportunity to respond to an article on private equity and venture capital shill site peHUB, written by a corporate attorney, about things to consider when you are selling a private company. As advertised, it is geared towards the owners of private companies, who generally face a simpler and less complicated set of constraints and obligations than the Boards of publicly held ones. Of its type, it is a reasonably comprehensive and useful guide.¹

In it, Mr. Stewart offers the following considerations concerning whether you should hire a flesh-eating investment banker like me when you are selling your private company:

*Do You Need an Investment Banker? Investment bankers can add significant value in an M&A process, but they are expensive. Investment banker fees typically range from 1 percent to 2 percent of the deal value, although the fees vary by deal size and profile. Typical benefits of having a banker in an M&A process include having an agent to (1) advise on market trends and valuation, (2) approach potential acquirers with which the target’s executive management would not otherwise have contact, (3) take the difficult, “bad cop” negotiating positions, and (4) co-manage the sale process with the target’s legal counsel.

Now this is fine advice, as far as it goes, but it omits some pretty important content and nuance that I, your reliable guide to all things overpriced and intermediary, will be happy to impart herewith.

Deferring our discussion on whether M&A advisory fees are in fact “expensive” and if so how for later (I promise), I can first address Mr. Stewart’s itemized reasons for hiring a banker by contrasting them with what corporate lawyers typically do in deal contexts. On the first two points the author is correct by implication: rare (and professionally worrisome) is the lawyer who is concerned with markets and valuation, and even rarer (and in likely violation of her professional ethics) is the lawyer who spends time and energy soliciting buyers for her client. These are tasks for which lawyers are unsuited by training, focus, and predilection, and if the client wants someone other than himself to weigh in on such matters and perform such heavy lifting he needs to hire someone for whom they are suited. The third task is more nuanced, as lawyers are perfectly capable of acting (and often quite happy to act) as “bad cop” (read flaming asshole) in matters properly considered legal, but it is true that bankers adopt this role more naturally and properly in matters business.

The fourth task is generally a bone of contention for lawyers and bankers on a deal, as each usually considers the other an interfering nuisance who focuses on the wrong things at the wrong times. Nevertheless, it is true that a properly run deal process usually starts with the banker running things until definitive negotiations begin between the seller and the potential buyer, at which point the seller’s attorney takes over to control the legal minutiae of drafting purchase agreements and other such trivia. While I am convinced many if not most deal attorneys would be delighted if they never had to deal with another investment banker again, bankers are more than pleased to have lawyers around to handle the boring scut work of transaction documentation and risk mitigation. After all, somebody has to stay behind to argue over semicolons while the banker takes her client off for a nice, celebratory bottle of Échezeaux.

* * *

But Mr. Stewart misses three very important reasons why it usually makes sense for a private company, in particular, to hire an investment banker to sell itself. The first is the fact—evident if an attentive reader were to consider the range and complexity of the tasks Mr. Stewart himself recommends the seller perform—that selling a company is long, complex, and difficult work. A typical sale process, depending on its structure and the number of potential buyers it involves approaching, can last anywhere from four to six months or longer, and that is if all goes well. During that time, company management and owners (usually the same people) must continue to run the firm with the same level of intensity and focus they do normally, otherwise things being things and people being people results will start to wobble or decline, and the intrinsic value and earning power of the business will erode. Yet pre-deal preparation, internal due diligence, and identification and potential communication with selected potential buyers all take a substantial amount of time, and once the deal is launched keeping it humming along and tending to its myriad details and interruptions requires constant daily attention. Virtually no private company of normal size has the extra personnel or dedicated, trained professionals to handle this properly, and, frankly, few private company CEOs or CFOs have the skill or training either, even if they did have the time. (And they don’t. Or shouldn’t.) A skilled sell-side advisor will manage this entire process, and she will arrange things so company management spends as little time as necessary providing the input, attention, and personal presence they must so they can continue to focus on their day jobs. Lawyers just don’t do this sort of thing.

Second, a good² M&A advisor will bring market intelligence to bear on a sell-side assignment which nobody else—not even a dedicated internal M&A functionary at a large private company—can come close to providing. This is detailed, intimate knowledge of a firm’s potential buyers, based on comprehensive discussions and extensive deal experience and interaction with all of them. As I’ve written before,

You might think that a participant in a particular industry should know the strategic intentions and capabilities of its direct competitors well, but normally you would be wrong. Competitors do not talk to each other directly about strategy because—wait for it—they are competitors. On the other hand, it is the job and practice of any good investment banker not only to develop an informed opinion about how each significant competitor in a space thinks about strategy but also to have done so by talking directly with them, frequently if possible. This is simply not practical for most corporations. Investment bankers are normally far better informed about the strategic landscape of an industry than any one of its participants.

And this knowledge is not limited to other companies, either. A good advisor will also know the likely, potential, and just-barely-possible buyers of her client among the financial sponsor (private equity) community, too. Not only will such a banker know these parties and their own acquisition appetites and capabilities well, she will know which ones of them are complete and utter assholes, which ones tend to fire the management teams they acquire with companies within the first year of purchase, which ones like to bait and switch sale processes by bidding high then whittling down their offer during exclusive negotiations, and which ones are irredeemable bottom feeders.³ This is invaluable information which even the best informed private company in the most incestuous industry has very little of, if any.

Knowing the likely buyers in the private equity world and being able to bring them to the table is critical in virtually every industry sale process nowadays. Not only are sponsors often the best capitalized and most aggressive buyers, they are almost always faster and more professional than the strategic buyers in an industry, because unlike the latter the former do deals for a living. Incorporating this type of determined, fast-moving buyer into a sale process is very helpful even if the seller and his banker think the most likely buyer is a competitor in the same business, because it helps the banker keep time pressure and process discipline on the strategic buyer which might otherwise dissipate. They also usually offer a very different purchase alternative to a private company seller: sell us your business, then come work with us as a (junior) partner to build it bigger so we can sell it to the next guy, and you will get a second bite at the apple. This, in contrast, to the typical offer from a strategic competitor: sell us your business, then either join us as a salaried employee or go away. Many private company owners prefer selling to private equity firms for this very reason nowadays, but they are babes in the woods when it comes to knowing those buyers. A skilled investment banker can offer crucial guidance in this area.

Third and last, surprisingly enough—given the regular beatings good sell-side advisors give potential buyers in M&A deals—most serious buyers prefer private companies to have professional sell-side help engaged. This is for all the reasons cited above: they know most private companies do not have the time, M&A experience and discipline, or negotiating skill to run a tight, efficient transaction process. Buyers want to know the person sitting across the table from them is not procrastinating, flip-flopping on deal provisions or objectives midstream, or negotiating in a disingenuous or irrational manner. Being a buyer of companies is expensive and time-consuming, too, and buyers who are serious don’t like to suspect their time is being wasted. Having a professional investment banker across the table gives them some confidence, because everybody knows no investment banker would allow herself to be hired by a client who wasn’t serious themselves.

And this, at the last, is probably the most compelling reason a private company should hire a financial advisor to sell itself: because that banker will make sure to keep her client disciplined and focused on accomplishing the sale. Privately held companies—for all sorts of good, bad, and indifferent reasons—can often be pretty squirrelly, and nothing will kill a deal faster than a squirrelly seller. After keeping buyers in line, a good sell-side advisor’s principal role is to keep her own client’s eyes on the prize.

* * *

Which brings us to the matter of expense. It is true that, for most deals, the check a seller writes to his investment banker is usually the biggest one crossing the closing table other than the purchase price itself. Even so, one or two percent of the transaction value is arguably a pretty small price⁴ to pay for someone who has broadened the potential universe of buyers, guided and directed the sale to achieve the highest price and best non-price terms available given the seller’s other objectives, and performed all the tiresome, dirty work of managing a complex sales process for upwards of six months or more. Even more compelling, except for the occasional nominal retainer, the success fee a banker earns upon her client’s sale is just that: a success fee. If the sale fails, or her client withdraws his company from the process for whatever reason, she does not earn anything. Her risks and incentives are completely aligned with those of her client, assuming of course her client really wants to sell.

And that is the real answer: if you’re not really sure you want to sell your company, don’t hire an investment banker. It is our job and embedded in the way you pay us to do everything in our power to close your transaction, including beating you up if you’re backsliding, procrastinating, or otherwise doing anything unreasonable and likely to derail a potential sale. Other bad reasons—like you’d like to play investment banker yourself, no matter how much it costs you in distraction from your core business, diminished transaction value, and fruitless legal and accounting expense—are also good arguments for not hiring a banker, but presumably you are too intelligent to need me to tell you that.

Of course, any good corporate law firm would be more than happy to accommodate you in such circumstances. After all, they charge by the hour.

Related reading:
Matt Stewart, Things to consider when selling a private company (peHUB, July 28, 2014)
Eight Reasons Not to Hire an M&A Advisor. And One Reason to Do So (May 14, 2011)
A Good Start (January 19, 2011)

¹ If I’m being honest, as I claim, I think the author is a little lackadaisical about describing the necessary structure and elements of the sale process for a private company. While he gets the major elements right, he is a little slapdash in describing how they all fit together. It has been my experience that a robust and disciplined process is absolutely necessary to keep deals moving at an appropriate pace, to encourage potential buyers to play nicely, and to keep the seller focused on what needs to be done. Without a firm hand on the tiller (and an eagle eye on the clock), there is a tendency for all deals to fritter away into time- and money-wasting nonsense. Given the fact that, of all the players involved in these little dramas, lawyers are usually the only ones paid by the hour, I will leave it to the cynics in the audience to conclude whether this omission was intentional.
² The perceptive among you will note that my use of “good” here is definitely normative, if not prescriptive. The type of knowledge which informs nuanced, deep understanding of the strategic landscape of an industry is normally only collected by investment bankers focused on and active in that industry. This means if you value and want such knowledge you should search for an advisor from among those who actually have it, rather than the generalist sell-side firms who market themselves as one size fits all. They are prolific sausage factories, it is true, but all the sausages tend to come out the other end looking the same. Just sayin’.
³ Yes, we know who you are. All of you. You, too.
⁴ Unless you are paying 2% for a billion dollar deal or greater, in which case your banker is a shyster and you are a fool. Or neither one of you cares how much of your public shareholders’ money you waste.

© 2014 The Epicurean Dealmaker. All rights reserved.

Where Did He Learn to Negotiate Like That?

noreply@blogger.com (The Epicurean Dealmaker) — Sat, 02 Aug 2014 22:39:00 +0000

Korbin Dallas: “We need to find the leader. Mangalores won’t fight without the leader.”
Mangalore Leader: “One more shot, we start killing hostages.”
Korbin Dallas: “That’s the leader.”
Mangalore Leader: “Send someone to negotiate.”
Security Chief: [to Dallas] “I I I I I’ve never negotiated I…”
Korbin Dallas: “Mind if I… try?”
Security Chief: “No, no, sure, sure. Sure. [to Mangalores] We’re sending somebody in to negotiate!”
Korbin Dallas: [walks into room, shoots Mangalore leader between the eyes] “Anybody else want to negotiate?”
Security Chief: “Wh-wh-wh-where’d he learn to negotiate like that?”

— The Fifth Element

Unlike many of you, O Dearly Beloved, I am old enough to remember a time when air travel did not offer wireless internet in flight. As a result, when junior bankers like me did not have work papers to review or spreadsheet modeling or presentation editing to do on our laptops,¹ we were thrown back on our own devices when it came to entertaining ourselves with something other than the crappy movies playing on low res CRT screens hanging from the ceiling. Normally I would bring some combination of newspapers, magazines, equity research reports, and a book or two to occupy my time, but occasionally said distractions would fail to engage me or I would simply run out of material to read before the flight ended. On those occasions, in desperation for something to distract me from the grim environs of a 30-year-old narrow body aluminum tube stuffed with sweaty tourists and bedraggled business travelers, I would sometimes stoop to leafing through the airline magazine jammed conveniently in the seat back pocket in front of me.

This rarely offered much relief, but I do recall frequently encountering the same stiff, glossy multipage ad for a well-dressed chap named Chester Karras, who generously offered to teach the ambitious road warrior the secrets to becoming a master negotiator, for a hefty price. “You don’t get what you deserve,” his tagline warned, “You get what you negotiate.” Putting aside the wisdom of advertising such services to the rumpled middle manager wedged into the middle seat of aisle 32 on the 9:18 pm flight from Dallas to Abilene, these ads always reminded me that true negotiating skill is surprisingly rare among most businesspeople.

* * *

For spectacular anecdotal proof of this observation, we need only turn to last week’s article in DealBook about the nasty bollocking mustachioed technology advisor extraordinaire Frank Quattrone’s firm Qatalyst Partners delivered to its erstwhile client, Trulia, in the latter’s recently announced sale to competitor Zillow. To an aficionado of the dark arts of M&A, there are many odd and interesting nuggets to be gleaned from this brief article about the behavior of Trulia and Qatalyst, which I thought you kindly people would find amusing to review with me on a languid Saturday afternoon.

First, there is the apparent fact that, after hiring Qatalyst three years ago to sell itself to (presumably) Zillow and perhaps one or more other potential buyers, Trulia apparently never terminated the engagement when it failed to lead to a sale. This, as we technically describe it in the trade, was Just Fucking Stupid. Engagement letters between clients and financial advisors are normally open-ended contracts which describe reciprocal duties and obligations which do not expire until the transaction contracted for occurs or one or both of the parties explicitly terminate them. The notion that Trulia could hire Qatalyst to sell itself, have that process fail, and subsequently move on to an initial public offering and other activities for three years without bothering to terminate an open-ended sale contract is just ludicrous. For this mistake alone, somebody in the executive suite of Trulia—the General Counsel or Chief Financial Officer are the most likely candidates—should have their head handed to them.

Second, there is the matter of Qatalyst’s original fee, which the DealBook article describes as “about 2 percent.” Now, I don’t know (or care) what Trulia’s purported enterprise value was three years ago when it first engaged Quattrone’s merry band, but I would be surprised if it was much below a billion dollars. (Remember, they just got sold for $3.5 billion this past week.) Now I understand that the technology world operates in its own reality distortion field, but I have to confess I was stunned by that fee percentage. In the normal business world, where industrial logic and economic pressures operate in place of the moonbeams and unicorn piss of tech land, a billion dollar sale mandate should earn the sell-side advisor flogging it significantly less than one percent of transaction value. Advisor success fees are heavily negotiated on a deal-by-deal basis, but they normally have some relation to normal fees normally earned by normal advisors normally. This one looks like Trulia’s CEO just hiked up his skirts and asked his Qatalyst banker how far he wanted him to bend over the barrel.

Third, there is the matter of the fee Trulia negotiated with JPMorgan for the current mandate which resulted in its sale to Zillow. This DealBook reported as about 1.5 percent. You might think JPMorgan was mighty gentlemanly to accept a lower percentage fee for the higher sale amount, until I inform you it is somewhere between four to five times the normal fee for a three billion plus dollar transaction outside tech land. The rack rates which investment banks try to achieve in M&A transactions are based on advisory fee schedules which in turn are based on competitive fees earned by them and their competitors in hundreds of transactions annually. In other words, a market. These fees decline as a percentage of transaction value as the size of the transaction increases, and most financial advisory firms’ fee schedules show transaction fees of fractions of a percent at these levels.

* * *

Now perhaps Qatalyst Partners’ and JPMorgan’s technology bankers really are the sort of special snowflakes who can deliver $50 to $70 million of advisory value to Trulia. Perhaps Frank Quattrone and his colleagues use secret photos of every Silicon Valley founder, CEO, and venture capitalist engaged in unnatural acts with scrofulous barnyard animals to boost their negotiating leverage when it comes to striking terms on engagement letters and actual transactions. Barring that, however, I am skeptical, as a technology outsider, that any of these clowns can offer anything special enough to merit fees which are many multiples of the fees which highly talented M&A advisors outside the technology bubble would be delighted to work for. Especially if both transactions were targeted primarily or solely at one buyer, Zillow, which makes many of the deal dynamics and negotiating complexities much less burdensome. After all, it’s not like the companies involved are particularly technical or require particularly specialized skills from their advisors.

I take this as yet more proof that the denizens of Silicon Valley think they are special, and the normal rules of gravity and economic interactions do not apply to them. Perhaps the executives and owners of technology firms are delighted to spread higher than normal fees around to their pals and enablers in the banking world in exchange for extracting ridiculous sums from the pockets of widows, orphans, and idiot venture capitalists to fund their fantasy business models in the first place. I’m not sure I would be so happy to pay an extra $40 million in success fees to bankers who sold my company because my CEO and his staff were too inept to negotiate their way out of a paper bag with a map and a blowtorch, but then again I am not Silicon Valley’s demographic.

And this, in the end, has clearly been my mistake. Effective immediately, I am rebranding myself as an M&A advisor for technology companies, offering skilled buy- and sell-side services at a mere 300% of retail.

Shit, I use Twitter and Blogger.com. I’m a friggin’ natural.

Related reading:
David Gelles, Old Attempt to Sell Real Estate Website Trulia Rewards Ex-Adviser Qatalyst Now (DealBook, July 29, 2014)
Killing People Is a Bad Habit (August 28, 2009)

¹ You might think plane flights would be an excellent time to get tasks like this done: no interruptions by clients or superiors, relative quiet, and few distractions of interest. In actual fact, bankers often forgo catching up on pressing work due to the risk competitors or strangers on the plane might look over their shoulder and get a glimpse of confidential information. Quarters are close in economy class, and unless your immediate neighbor is a co-worker who can shield you from prying glances, most serious work should be deferred until you get back into the office. So, once again, junior bankers are screwed.

© 2014 The Epicurean Dealmaker. All rights reserved.

Improve Yourself

noreply@blogger.com (The Epicurean Dealmaker) — Sun, 27 Jul 2014 20:08:00 +0000

Liberal Education makes not the Christian, not the Catholic, but the gentleman. It is well to be a gentleman, it is well to have a cultivated intellect, a delicate taste, a candid, equitable, dispassionate mind, a noble and courteous bearing in the conduct of life.

— John Henry Cardinal Newman, The Idea of a University

Last week, former Yale professor and current essayist and writer William Deriesiewicz penned a jeremiad against elite higher education in this country which not only excoriated his former employer but also all such cognate institutions of higher learning which aspire to the top of the annual listing of “best” colleges and universities put out by U.S. News & World Report. He has many criticisms to offer, including the fact that colleges like Yale do not in fact teach their students to think, but rather to be timid, anxious careerists following blindly in the well-worn ruts of privilege their parents, peers, and society have picked out for them:

Our system of elite education manufactures young people who are smart and talented and driven, yes, but also anxious, timid, and lost, with little intellectual curiosity and a stunted sense of purpose: trapped in a bubble of privilege, heading meekly in the same direction, great at what they’re doing but with no idea why they’re doing it.

Contrary to their carefully maintained public image and stated mission, Deriesiewicz also denies that these institutions’ educational curricula are as intellectually demanding or their student bodies are as truly diverse as they like to claim. Instead, he blasts them as bastions of existing privilege which train and credentialize a blinkered socioeconomic elite to reproduce itself.

Allowing for some artistic license and the exaggeration natural to a magazine article writer intent on drumming up advance sales of his book, I have to say I cannot materially disagree with Mr. Deriesiewicz. The only question I have is why it has taken him, a college professor with a decade at least in the very belly of the beast, so long to discover what everybody else has known for approximately ever.

* * *

Mr. Deriesiewicz seems shocked, shocked to discover that 250+-year-old institutions charging rack rates north of $60,000 per year to convey some tangled Latin prose on sheepskin to spotty youngsters at the end of four or more years—institutions for which the combined endowments exceed the gross national products of several small countries—should be complicit in the perpetuation and justification of entrenched socioeconomic power structures. Whence, exactly, did Mr. D think these universities’ wealth, status, and prestige come from? Whence the demand for their services? From whom?

From the dimmest reaches of time on, Most Patient and Attractive of Readers, elite educational institutions have been founded, mirabile dictu, to educate the elite: to inculcate and train the ruling class in those arts, preferences, and temperaments which would be conducive to their wielding of power and privilege (q.v. Cardinal Newman supra) and to introduce them to their peers and future colleagues in business, government, and society. In the earliest days, such institutions mostly served as high class finishing schools for the sons [sic] of the rich, as well as training grounds for a limited class of administrators and functionaries the rich relied on to manage their affairs, such as politicians, military officers, and the clergy. Over time, these institutions widened their reach beyond the landed gentry and wealthy merchants to encompass the growing ranks of the striving administrative classes, including, most importantly, the vast numbers of middle class merchants, businessmen, and professionals who would comprise the bulk of the modern market-based economy. Eventually—much later—the doors were opened to women; first as a sop to the daughters of the rich who wished to enrich their unemployed adult lives, and later to those female coequals who began to invade and swell the numbers of the workforce. Along the way, elite institutions began to admit increasing numbers of “outsiders” such as Jews, men and women of color, and other more marginal ethnic, racial, and socioeconomic groups.

But each and every time they added more groups to the circus tent, elite educational institutions remained focused firmly and irrevocably on serving the elite: legitimizing, justifying, and expanding the elite, but serving the elite nonetheless. It’s like The Preppy Handbook joked about Princeton in the 1980s: only 20% of freshmen entered as preppies, but 80% of graduating seniors exited as such. Just so, the Ivy League may admit 12 to 15% of their incoming classes from households where the student is the first person in her family to attend college, but by the time she graduates she will have been anointed—and will have fully internalized her right and privilege to become—a fully fledged member of those citizens credentialed to enter the ruling class. In addition to replenishing their ranks, this suits the elite just fine, since the meritocratic myth that at least a few outsiders can join their ranks via hard work and talent is an excellent way to keep the rest of them docile. Besides, they can always admit a small number of international students who pay full freight in order to subsidize the scholarship kids.

So Mr. Deriesiewicz’s outrage that the Ivy League helps perpetuate the dominance of elites and contributes to socioeconomic inequality seems to miss the point. That is what they have always done. That is their primary purpose.

* * *

Likewise, the ex-professor’s disappointment that so many students at elite universities demonstrate so little interest in the opportunities such institutions offer to expand their minds, take risks, and learn to connect with themselves is misplaced. Surely these are admirable goals for some, but it is the height of presumption to insist they should be the goals of every student who attends college. For in my experience, the diversity which Mr. Deriesiewicz pooh-poohs on the basis of class exists in full force when it comes to the intellectual curiosity, interests, and objectives which students bring to elite colleges. There are future businesspeople, politicians, lawyers, medical doctors, athletes, and the like at Yale and every other similar college. The portion of true scholars, future PhDs or college professors, and restless seekers after knowledge in a top flight university is not much different than that of the general population: small. Many future non-scholars do indeed take the opportunity to stretch themselves here and there, and perhaps a few reconsider their life goals upon encountering Spinoza or Cervantes, but the unfettered life of the mind is a true calling for very few.

Being a former, current, and future paying customer of these institutions, I can personally attest they actually do a reasonably good job exposing their students to opportunities to challenge their assumptions, broaden their knowledge, and get in touch with their inner selves. They do this by requiring students to fulfill distribution requirements across disciplines, offering a staggering breadth of classes to choose from, and enabling them to interact with dozens if not hundreds of professors and other students just as smart or smarter than they are who do not believe or think the same as they do. The colleges Mr. Deriesiewicz derides are often the first places where these talented, driven children have a real opportunity to spread their wings and take the kind of risks he admires. That being said, if a kid attends Princeton with the monomaniacal goal of becoming a Goldman Sachs investment banker for life, there is nothing any university can do to make him drink deep from the font of self- or other-knowledge. This is not Princeton’s problem, either. Cherchez la mère et le père.

* * *

In fact, an alternate reading of the professor’s complaint could leave a perceptive reader with a substantially more sanguine opinion of the state of higher education in America than the one he offers. First, the mere fact that prestige magnets like Harvard and Yale—which attracted 34,295 and 29,610 applications from all over the world for 1,662 and 1,359 spots in the Classes of 2018, respectively—actually do not fill their classes entirely with the moneyed careerist offspring of high-status alumni is a positive thing. The student diversity such colleges actively promote actually means lots more “pointy” (unusually talented, not well-rounded) candidates finally get in than one might otherwise suspect. Sure, this may benefit the technocratic elite and the current socioeconomic power structure as a whole (and usually does), but tell that to Buffy Witherspoon, IV’s parents when she is declined for admission in favor of a low-income genius from Compton who wants to study Catalan poetry and neurochemistry.

Second, the fresh blood which these elite systems suck into the power structure not only legitimizes it via promoting the oversold myth of equal opportunity and meritocracy, it also strengthens it by bringing new perspectives, different backgrounds, and unconventional ambitions to the party. Sure, the ruling class co-opts its potential enemies by making them one of the club, but this is good both for the ruling class and for the revolutionaries it co-opts. This may not make the Marxists in the audience happy, but it enables socioeconomic evolution and change in ways that may, at the end of the day, be significantly more than trivial.

Finally, the staggering rise in the number of kids who go to college in America over the past few decades¹ has not only made admission to the top ranked universities insanely competitive, it has also improved the quality of dozens if not hundreds of second, third, and fourth tier colleges. The colleges where top quality students can get an outstanding education—practical, theoretical, or both—are far more numerous than they used to be, simply because the demand for spaces and the quality of applicants have both risen dramatically. What parents, students, and, yes, critics like William Deriesiewicz have to realize is a bright, ambitious student has far more than seven or eight acceptable colleges to apply to nowadays. And not getting into Yale, Harvard, Stanford, or Princeton is not the life-ending tragedy the neurotically competitive parents of the private school set might think it is.

* * *

Like many academics before him, I fear Professor D has confused the mission, purpose, and legitimacy of our higher education system with the mission, purpose, and legitimacy of the ivory tower. The latter is and always has been servant to the former, not its master. And the former likes the way things are just fine, thank you.

Besides, nobody’s forcing you to apply to Harvard.

Related reading:
William Deriesiewicz, Don’t Send Your Kid to the Ivy League: The nation’s top colleges are turning our kids into zombies (The New Republic, July 21, 2014)
Sovereign Triviality (November 19, 2011)
In the Nation’s Service (December 29, 2011)
The Standard Model (February 18, 2012)
No Country for Young Children (October 21, 2012)

¹ Your Forgetful Bloggist remembers reading not long ago from a source he cannot recall that whereas approximately 48% of the high school graduates eligible for college actually attended college in 1980, by 2010 that percentage had risen to 68%. Combined with general population growth over those decades, that means the college admissions pool has increased in both size and quality spectacularly since YFB graced the leafy groves. I maintain, for what it is worth, that there is no way in hell I could get into the college which accepted me when I was a mere sprout today. Sadly, nobody who knows me personally disagrees when I say this.

© 2014 The Epicurean Dealmaker. All rights reserved.